An insurance paradox

Michael R. Powers

Journal of Risk Finance, 2006, vol. 7, issue 2, 113-116

Abstract: Purpose - To consider why the law of large numbers does not play a more significant role in determining an insurer's financial leverage. Design/methodology/approach - Insurer‐group data show that there is little relationship between an insurer's premium volume and its overall leverage (i.e. net written premium‐to‐surplus ratio). An explanation is sought for the lack of a positive scale effect by considering concomitant negative scale effects. Findings - It is argued that insurers frequently convert the benefits of the law of large numbers into economic subsidies for expanded writings that include poorer risks. Originality/value - The editorial identifies and explores a significant scale phenomenon in the insurance sector that is generally overlooked.

Keywords: Risk management; Gearing; Underwriting (search for similar items in EconPapers)
Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jrfpps:15265940610648562

DOI: 10.1108/15265940610648562

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