Abstract
Following Modigliani and Miller [1958], it has been customary to address the capital structure issue on the assumption that the firm’s operating decisions are predetermined and separable from its financing decisions. This convenient separation of operating and financing decisions is inappropriate for financial intermediaries. For example, Sealey [1982] points out that, for banks, the issue of deposits is simultaneously an operating and a financing decision. Similar issues arise for insurance firms. The sale of insurance policies generates the operating revenue of the insurance firm. But, although these “debt like” instruments are sold in the insurance product market (rather than in the capital market), they afford the firm a source of capital. The insurance “debt” and the equity issued by the insurer are used to construct a portfolio consisting of mostly of financial assets.
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Doherty, N. (1989). On the Capital Structure of Insurance Firms. In: Cummins, J.D., Derrig, R.A. (eds) Financial Models of Insurance Solvency. Huebner International Series on Risk, Insurance, and Economic Security, vol 10. Springer, Dordrecht. https://doi.org/10.1007/978-94-009-2506-9_9
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DOI: https://doi.org/10.1007/978-94-009-2506-9_9
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