Firm size and risk taking in Malaysia's insurance industry

Abstract

Purpose

The purpose of this paper is to provide insights on how a firm's size is related to risk taking of Malaysia's insurance companies, from 2000‐2010.

Design/methodology/approach

The sample used for empirical testing in this study comprised direct insurance firms licensed under Malaysia's Insurance Act 1996, for the time frame between 2000 and 2010. Pearson's correlation, fixed and random effects models, and the system Generalized Method of Moments (GMM) method were used in this study.

Findings

Both the fixed effects and the system GMM panel data regression models suggested a positive link between the insurance firm size and underwriting risk. For the robustness test, the results of the analysis using changes in data broadly resemble the outputs of the levels estimation.

Research limitations/implications

The sample of this study is limited to Malaysia's insurance sector only.

Originality/value

Advocates of the too‐big‐to‐fail (TBTF) theory believe that government support and the guarantee of a financial bailout are warranted for large financial institutions facing crises, for the main purpose of avoiding disruptions within a country's economy. The drawback, however, may be that the TBTF doctrine is the culprit behind excessive risk taking by insurance firms of large proportions. A number of regulatory concerns have been raised and addressed from this study.

Citation

Hock Ng, T., Lee Chong, L. and Ismail, H. (2013), "Firm size and risk taking in Malaysia's insurance industry", Journal of Risk Finance, Vol. 14 No. 4, pp. 378-391. https://doi.org/10.1108/JRF-11-2012-0079