Journal of Banking & Finance,Vol. 34, Issue 10, Pages: 2450-2461.
This paper examines the impact of capital-based regulation on the insurer’s risk and capital adjustments in the US property-liability insurance industry. We conduct the three-stage least squares (3SLS) procedure to estimate a simultaneous equations model. The key finding is that undercapitalized insurers increase capital to avoid regulatory costs and take more risks to generate higher returns. We also investigate firm characteristics that determine the insurer’s capital structure. The results indicate that insurers appear to rely heavily on …