Title

Capital structure in the property-liability insurance industry : tests of the tradeoff and pecking order theories

Document Type

Journal article

Source Publication

Journal of Insurance Issues

Publication Date

Spring 2012

Volume

35

Issue

1

First Page

1

Last Page

43

Publisher

Western Risk and Insurance Association

Keywords

Risk‐based capital, tradeoff theory, pecking order theory

Abstract

This study examines whether property-liability insurers have an optimum capital structure by testing the tradeoff and pecking order theories for this industry. Capital structure is measured with the net premiums written to surplus ratio, and alternatively, with the liability to asset ratio. The results indicate that the tradeoff theory dominates the pecking order theory in explaining property-liability insurer capital structure. Further, mutual and stock insurers appear to have different target capital structures, as agency theory suggests. Finally, mutual and stock insurers do not adjust at different speeds to their optimal capital structure.

Print ISSN

15316076

E-ISSN

23324244

Publisher Statement

Copyright © 2012 by the Western Risk and Insurance Association.

Full-text Version

Publisher’s Version

Recommended Citation

Cheng, J., & Weiss, M. A. (2012). Capital structure in the property-liability insurance industry: Tests of the tradeoff and pecking order theories. Journal of Insurance Issues, 35(1), 1-43.