The Impact of Product Diversification on Risk-taking Behavior in Property and Liability Insurance Firms

Chen-Ying Lee

Journal of Applied Finance & Banking, 2020, vol. 10, issue 3, 9

Abstract: This paper aims to analyze product diversification and risk taking behavior with a comprehensive look at the property-liability (P-L) insurance operations for a developing economic environment. Using a panel data to examine the impact of product diversification and risk taking behavior in Taiwanese P-L insurers. The study finds that product diversification is significantly negatively related to the risk taking behavior of P-L insurers, which implies that product diversification reduces the risk inherent in each business line and ultimately the overall portfolio risk. The results are consistent with the portfolio theory in finance. I find that firm growth, long-tail line and financial holdings have significant impacts on underwriting risk. Furthermore, the firm age, insurance leverage, long-tail line, ROI, and liquidity ratio have significant effects on leverage risk. The study provides some valuable insights into the effects of diversification and risk taking behavior of P-L insurers in a developing country as well as for the improvement of insurance regulation policy in Taiwan. JEL classification numbers: C23, G22, L25.Keywords: Risk-taking, Product diversification, Property-liability insurance.

Date: 2020
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