mono-2008-m-as08-1-hoyt - 1 The Value of Enterprise Risk...

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1 The Value of Enterprise Risk Management: Evidence from the U.S. Insurance Industry Robert E. Hoyt** Dudley L. Moore, Jr. Chair of Insurance Andre P. Liebenberg Copyright 2008 by the Society of Actuaries. All rights reserved by the Society of Actuaries. Permission is granted to make brief excerpts for a published review. Permission is also granted to make limited numbers of copies of items in this monograph for personal, internal, classroom or other instructional use, on condition that the foregoing copyright notice is used so as to give reasonable notice of the Society's copyright. This consent for free limited copying without prior consent of the Society does not extend to making copies for general distribution, for advertising or promotional purposes, for inclusion in new collective works or for resale. ** Corresponding author.
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2 Abstract Enterprise risk management (ERM) has been the topic of increased media attention in recent years. Many organizations have implemented ERM programs; consulting firms have established specialized ERM units; and universities have developed ERM-related courses and research centers. Despite the heightened interest in ERM by academics and practitioners, there is an absence of empirical evidence regarding the impact of such programs on firm value. The objective of this study is to measure the extent to which specific firms have implemented ERM programs and, then, to assess the value implications of these programs. We focus our attention in this study on U.S. insurers in order to control for differences that might arise from regulatory and market differences across industries. We use a maximum-likelihood treatment effects framework to simultaneously model the determinants of ERM and the effect of ERM on firm value. In our ERM-choice regression we find ERM usage to be positively related to firm size and institutional ownership, and negatively related to reinsurance use and leverage. By focusing on publicly traded insurers we are able to estimate the effect of ERM on Tobin’s Q, a standard proxy for firm value. We find a positive relation between firm value and the use of ERM. The ERM premium is statistically and economically significant and approximately 17 percent of firm value.
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