An insurance paradox

Abstract

Purpose

To consider why the law of large numbers does not play a more significant role in determining an insurer's financial leverage.

Design/methodology/approach

Insurer‐group data show that there is little relationship between an insurer's premium volume and its overall leverage (i.e. net written premium‐to‐surplus ratio). An explanation is sought for the lack of a positive scale effect by considering concomitant negative scale effects.

Findings

It is argued that insurers frequently convert the benefits of the law of large numbers into economic subsidies for expanded writings that include poorer risks.

Originality/value

The editorial identifies and explores a significant scale phenomenon in the insurance sector that is generally overlooked.

Citation

Powers, M.R. (2006), "An insurance paradox", Journal of Risk Finance, Vol. 7 No. 2, pp. 113-116. https://doi.org/10.1108/15265940610648562