Firm's demand for insurance: An explorative approach

• Published date: 01 September 2019
• Author: Simone Krummaker
• Date: 01 September 2019
• DOI: http://doi.org/10.1111/rmir.12128

© 2019 The American Risk and Insurance Association

Risk Manag Insur Rev. 2019;22:279–301. wileyonlinelibrary.com/journal/rmir

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279

Received: 9 January 2017

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Accepted: 7 March 2019

DOI: 10.1111/rmir.12128

FEATURE ARTICLE

Firm’s demand for insurance: An explorative

approach

Simone Krummaker

Faculty of Actuarial Science and

Insurance, Cass Business School, City,

University of London, London, UK

Correspondence

Simone Krummaker, Faculty of Actuarial

Science and Insurance, Cass Business

School, City, University of London, 106

Bunhill Row, London EC1Y 8TZ, UK.

Email: simone.krummaker@city.ac.uk

Abstract

This paper addresses the question, what influences the

insurance demand of companies and examines the

influence of managerial risk aversion in this decision

process. An explorative research approach based on

qualitative data analysis is applied to explore the factors

influencing the insurance related decision behavior in

organizations. Using interviews and observations of

firm’s insurance managers, the results identify inter-

dependencies between factors of insurance demand,

such as ownership structure, managerial discretion,

volatility of earning, size, services of the insurer, and

business diversification which allows to propose a

framework of contextual factors affecting company’s

insurance demand. Within this framework, the data

imply managerial risk attitudes as decisive factor in the

decision process about insurance demand in companies.

This explorative study enriches the existing theories of

firms’insurance demand and addresses feedback from

practice into theory.

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INTRODUCTION

Organizations have a broad continuum of methods and processes available to handle risk. One

of the most important and relevant techniques in organization’s risk management is the

transfer of risk on insurance companies. Firms are the largest insurance holders world‐wide;

major parts of the total property and casualty/nonlife insurance premiums are paid by

companies (OECD, 2012). Insurance plays an integral part in a company’s risk management

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and by transferring risk onto an insurance carrier, the company can release funds for an

efficient allocation. Despite the importance of insurance for companies as well as the

importance of commercial lines of business in the insurance and reinsurance industry, the

demand of companies for insurance is yet not explained by a coherent theoretical fundament.

Individual insurance demand can sufficiently be explained by the concept of risk aversion. In

contrast, the insurance demand of companies cannot be explained by a single coherent theory.

However, since Mayers and Smith’s (1982) seminal article, some theories have been developed,

that aim to explain the fact, that firms purchase insurance contracts. The drivers of firms’risk

management behavior can be categorized into agency conflicts, costs of diversification or

financial distress, tax optimization strategies, the regulatory background of the industry, the

insurers comparative advantage in risk and loss related services and the risk bearing of risk

averse stakeholders.

From the early 1990s until today, several empirical studies have put these theories to test.

The results of these studies show varying support for some of the hypotheses, depending on

data availability, composition of the sample, and the variables. Moreover, only very few

feedback processes between empirical and theoretical research in the area of firm’s insurance

demand are observed. Rarely any insights from empirical research are informing the

development or amendment of theory.The varying results and low replicability of empirical

studies (see also Regan & Hur 2007; Smith, 2004; Stulz, 1996; Tufano, 1996) might point out that

there are effects in a firms’practice influencing the risk management behavior and the demand

for corporate insurance which are still to be considered.

In this article one of the most fundamental questions according to Dorfman & Tippins (2006,

p. 66) in risk management and insurance education is addressed: “Why is the insurance

transaction made?”Furthermore, they also observe that risk management and insurance

research involves real‐world issues which would benefit from being addressed by multiple

approaches also beyond the quantitative science paradigm.

Often we do not completely understand why insurance is purchased in many cases

where it is not legally mandated. It is entirely possible that research based on

marginal utility analysis can misdirect attention form more realistic answers, and

retard more potentially profitable avenues of investigation (Dorfman & Tippins, 2006,

p. 66).

This paper also aims to address the theory–practice gap in finance research (see, e.g.,

Graham and Harvey, 2001) and to overcome the separation of empirical and theoretical

research with regard to firm’s insurance demand in order to broaden the understanding of what

influences firm’s insurance demanding behavior. Therefore, an explorative approach to

research factors affecting firm’s insurance demand is introduced.

This paper looks at the question, what influences the insurance demand of companies. My

study addresses the mentioned deficiencies and aims at (a) exploring influencing factors on

firms’insurance demand, (b) examining the influence of managerial risk aversion in this

decision process, and (c) integrating the factors into a framework of firms’insurance demand.

To explore the factors influencing this behavior, I follow an explorative qualitative research

approach as this method is considered to be better suited to enhance existing theories by taking

a fresh perspective. As this method provides a rigorous research process it is possible to

overcome inconsistencies in theories by discovering phenomena in a real‐world environment.

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