Societal trust, risk avoidance and corporate risk taking: evidence from the global insurance industry

Abstract

The global insurance industry is undergoing fundamental change, with countries that are classified as emerging economies (such as China and other countries in the Asia-Pacific region) playing increasingly important roles. In this article, we investigate the effect of two important dimensions of a country’s culture, societal trust and risk avoidance, on risk taking by insurance firms around the world between 2001 and 2014. We measure societal trust and risk avoidance using the World Value Survey. Our results indicate that there is a positive and significant association between the level of societal trust and insurer risk taking in a country, while there is a negative and significant association between the level of risk avoidance and insurer risk taking. We show that our main results are robust to changes in sample composition and potential bias related to the 2007–2009 global financial crisis. One possible concern is that insurer risk taking could be affected by many institutional and societal factors of a country that are not included in our regression analysis. To alleviate this concern, we use the two-stage least squares regression method with instrumental variables to address the potential endogeneity problem related to omitted variables, and find that our results remain unchanged. Additionally, we show that the negative relationship between risk avoidance and insurer risk taking still holds when we use alternative uncertainty avoidance measures.

Appendix: variable definitions and data sources

Dependent variable	Definition and data source
Trust variable
TRUST	We construct the measure of trust based on the World Values Survey question, which asks respondents, ‘Generally speaking, would you say that most people can be trusted or that you need to be very careful in dealing with people?’ Respondents will choose between two answers: ‘Most people can be trusted’ and ‘Can’t be too careful’. The first answer is coded as 1 and the second is coded as 0. We calculate the average response by country and year. Source: World Values Survey, own calculation
Risk avoidance variable
RISK_AVOID	We construct an alternative risk avoidance measure based on the following World Values Survey Question (in waves 5 and 6): ‘Adventure and taking risks are important to this person; to have an exciting life.’ The respondent will state whether such a description fits him/her by choosing from six answers: ‘very much like me’ (1), ‘like me’ (2), ‘somewhat like me’ (3), ‘a little like me’ (4), ‘not like me’ (5) or ‘not at all like me’ (6). We first convert the response by subtracting the original response from seven. We then calculate the average by country and year. Source: World Values Survey, own calculation
Insurer risk taking measures
STD_ROA	The natural logarithm of the five-year rolling window standard deviation of return on assets. Source: A.M. Best Statement File - Global, own calculation
CVUNDERLEV	The natural logarithm of the coefficient of variation of underwriting leverage, i.e. the standard deviation of underwriting leverage divided by the mean of underwriting leverage. The underwriting leverage is defined as the net premiums written divided by the total surplus. The standard deviation of underwriting leverage is calculated using a five-year rolling window. Source: A.M. Best Statement File - Global, own calculation
Firm-level control variables
SIZE	The natural logarithm of total assets
GROWTH	The annual growth rate of total assets
CAPITAL	Total surplus divided by total assets
NPLIAB	Total liability divided by gross insurance provisions
NPW/GPW	Total net premiums written divided by total gross premiums written
LISTED	A dummy variable that equals 1 when an insurer is a publicly listed firm and 0 otherwise Source: A.M. Best Statement File - Global, own calculation
Country-level control variables
GDPPC	The natural logarithm of GDP per capita. Source: World Bank’s World Development Indicator
GDP_GROWTH	The annual GDP growth rate. Source: World Bank’s World Development Indicator
GDP_VOL	The three-year rolling standard deviation of annual GDP growth rate. Source: World Bank’s World Development Indicator
PENETRATION	The ratio of premiums underwritten to a country's total GDP. Source: Swiss Re Sigma
CREDITGDP	The ratio of domestic credit to the private sector by banks to domestic GDP. Source: World Bank’s World Development Indicator
GI	The first principal component of the following five sets of variables: Control of Corruption, Government Effectiveness, Regulatory Quality, Political Stability and Absences of Violence, and Voice and Accountability. Control of Corruption refers to corruption perceptions, including both petty and grand forms of corruption. Government Effectiveness refers to the perceptions of the quality of public services, the quality of the civil service, the degree of its independence from political pressures, the quality of policy formulation and the credibility of the government’s commitment to such policies. Regulatory Quality refers to perceptions of the ability of the government to formulate and implement sound policies and regulations that promote private sector development. Political Stability and Absences of Violence refers to perceptions of the likelihood of political instability and motivated violence. Voice and Accountability refer to perceptions of the extent to which a country’s citizens are able to participate in selecting their government, freedom of expression, freedom of association and a free media. Source World Bank Worldwide Governance Indicators (2011)