Research On The Determinants Of The Capital Structure Of Insurers

The capital structure theory for the non-insurance enterprise has been extensively analyzed in the financial literature. In contrast, a similar type of capital structure available to the insurance company has received little attention in the insurance literature. Insurers, as a financial intermediary, are different than other firms. On the one hand, most insurers are protected by the guarantee fund, while on the other hand, insurers are under rigid solvency regulations (minimum solvency margin requirement). The choice of capital structure is appropriately viewed as a complex, multidimensional decision by insurer management. The paper investigated the determinants of the capital structure of insurers in the prospect of market regime and solvency regulatory regime. In the market regime, insurer's market capital structure is the capital structure that maximizes the value of the insurers in the absence of solvency regulation.This market captial structure which may differ for each insurer, is the ratio toward which each insurer would tend to move in the long run in the absence of regulatory capital requirements. The considerations for market capital structure are generic to all firms-insurers as well as non-insurers. Much of these considerations are based on the tax effects of debt, information asymmetries, agency costs and the costs of bankruptcy. These are theories that are generic to all firms-insurers as well as non-insurers. The market capital structure requirements may influence the capital decisions of any firm. However, the insurers have their own unique characters, and one point of departure of insurer capital structure theory is in the recognition that most insurers are protected by the guarantee fund, The guarantee fund, can be viewed as a put option and this put option is owned by the shareholders of the insurers. Hence, value maximizing shareholders have incentive to increase the capital structure (the strike price of the put) as well as the risk of the insurer. Consequently a manager of an insurer, acting in the interest of the shareholders would like to operate with no equity (at the limit), however the excessive risk taking is encouraged by the provision of guarantee fund has a countervailing force-Charter Value. Charter value can be simply defined as the "going concern" value of the insurer. In other words, it increases the costs of financial distress (bankruptcy) because shareholders will loose the franchise value in case of bankruptcy. Franchise value therefore provides capital structure risk-constraining incentives for firms to protect their franchise value. Without the solvency regulation(minimum solvency margin), the trade off between these two countervailing forces-the put option and the charter value-mainly determines the optimal capital structure for an insurer, there exists an interior optimal capital structure in an insurer with guarantee fund and charter value.But when the minimum solvency margin is set by the regulator, the insurer has to keep its capital ratio above a fixed minimum capital ratio. Otherwise, the insurer will suffer the regulatory cost. If the optimal market capital ratio is greater than the regulatory minimum, then the insurer is considered to be in a market regime, and the regulatory requirements don't influence its capital ratio, but if the optimal capital ratio with guarantee fund and charter value is less than the regulatory minimum, the insurer might be expected to just meet the minimum capital ratio, the insurer is considered to be in a regulatory regime.So the purpose of this study is use the data of property-liability insurers (from 2001 to 2006) in China to investigate the determinnants of insurance capital structure? And examine what kind of the regime affect the optimal capital structure of insurers? A regulatory regime or a market regime?. And this paper will investigate the relationship of capital structure of the insurers among the charter value, guarantee fund and solvency regulation.