An Analysis of Market Exit Forms and Decision Factors - A Case of the U.S. Property-Liability Insurance Market -
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This paper examines financial, managerial and market factors that insurance companies and regulators use to reach a decision of business continuance, merger/acquisition, or voluntary or involuntary liquidation of the entire business (i.e., a complete exit from the market). For this, we describe exit regulation in the insurance market and the importance of it on insurer operation s. We then use the A.M. Best database of the U.S. property-liability insurance industry for 1999-2004 (for t-1) and a multinomial logit regression approach to empirically estimate the impact of financial (profitability, underwriting performance, liquidity, capital adequacy and capital measurement), managerial and political environments on the market stay/exit decision making process. The results show that asset size is not only positively related to the probability of business continuance but also likely leads insurers to choose voluntary liquidation or merger instead of involuntary liquidation when they have decided to leave the market. Profitability and capital adequacy also affect market exit decisions. Underwriting performance seems to affect the decisions but not necessarily consistently across the market stay/exit choices.
Abstract
This paper examines financial, managerial and market factors that insurance companies and regulators use to reach a decision of business continuance, merger/acquisition, or voluntary or involuntary liquidation of the entire business (i.e., a complete exit from the market). For this, we describe exit regulation in the insurance market and the importance of it on insurer operation s. We then use the A.M. Best database of the U.S. property-liability insurance industry for 1999-2004 (for t-1) and a multinomial logit regression approach to empirically estimate the impact of financial (profitability, underwriting performance, liquidity, capital adequacy and capital measurement), managerial and political environments on the market stay/exit decision making process. The results show that asset size is not only positively related to the probability of business continuance but also likely leads insurers to choose voluntary liquidation or merger instead of involuntary liquidation when they have decided to leave the market. Profitability and capital adequacy also affect market exit decisions. Underwriting performance seems to affect the decisions but not necessarily consistently across the market stay/exit choices.
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