Does Captive Insurance Improve Firm Value? Evidence from S&P 500 Companies

Chang Mu-Sheng () and Chen Jiun-Lin
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Chang Mu-Sheng: Finance, Financial Planning, and Insurance, California State University, Northridge, CA, USA
Chen Jiun-Lin: College of Business, Valparaiso University, Valparaiso, IN, USA

Asia-Pacific Journal of Risk and Insurance, 2020, vol. 14, issue 1, 15

Abstract: This study investigates whether the use of captive insurers affects firm value for companies included in the S&P 500. Companies may use a captive insurance subsidiary to retain their risks for a lower cost than they would pay in premiums to a third-party insurer. Although captives are present in more than one-third of all firm-years between 2000 and 2016, this study fails to find evidence that owning a captive increases firm value effectively. Additional analysis reveals that firms that are larger, are listed on the New York Stock Exchange (NYSE), and have smaller proportions of capital expenditures and cash reserves tend to use captives. Overall, the results are inconsistent with previous research indicating that the market reacts positively to captive formation around the formation date. This suggests that incentives other than shareholder value maximization may have encouraged the use of captives during the sample period.

Keywords: Captive insurance company; captive insurance subsidiary; captive insurance structure; risk financing; risk retention; alternative risk transfer; risk management (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1515/apjri-2018-0009

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