Essays on decision-making in the insurance industry: An examination of the consumer demand for life insurance and insurer capital structure

This dissertation examines several aspects of decision-making within the U.S. insurance industry, both from the perspective of the consumer and from the perspective of the insurance company. The first essay examines the relation between the demand for life insurance and the occurrence of catastrophes. Prior research suggests that the occurrence of a catastrophe may lead to increases in risk mitigation, risk perception, and the demand for insurance. Given the extensive damage inflicted by major natural disasters, such a phenomenon is intuitive for property risk. However, the literature includes theory and evidence that suggest a broader behavioral perspective, and I therefore examine the possible link between catastrophes and subsequent demand for insurance against mortality risk. Based on U.S. state-level data for the period 1997 through 2008, I provide evidence of a significant positive relationship between catastrophes and life insurance demand. The finding holds both for states directly affected by the event and for neighboring states. In addition, evidence suggests that post-catastrophe life insurance demand is sensitive to the size of the catastrophe.;In addition to consumer decision-making, I also examine decision-making from the perspective of the insurer. Separate streams of empirical research suggest that firms may make adjustments toward a target capital structure, and that active internal capital markets (ICMs) exist within a variety of industries. While evidence supports the existence of targeting behavior on behalf of firm management and the existence of ICMs, no studies have examined how deviations from target capital structure relate to the use of ICMs. Based on a sample of affiliated property-casualty insurance companies and three commonly used measures of leverage, this study provides the first evidence of a link between deviations from target leverage and ICM activity. The findings suggest that affiliated property-casualty insurers do have target leverage ratios and that ICM activity is related to deviations from target leverage, where overleveraged insurers tend to cede more internal reinsurance and underleveraged insurers tend to cede less internal reinsurance.