Franchise Value and Insurer Performance

This study provides evidence that franchise value improves insurers’ operating performance. Essentially coming from an insurer’s market power, franchise value includes the insurer’s brand royalty, business networking, and underwriting and claim specialty. High franchise value firms who could charge more, have lower operating costs, and have a larger client base are potentially more profitable. On the other hand, to protect their franchise value, high franchise firms may skip high-risk but profitable investment opportunities, leading to poorer operating performance. Franchise value of insurance companies is notoriously difficult to measure because most of insurance companies are private companies. Therefore we quantify franchise value using company ratings assigned by the A. M. Best Company after controlling for various tangible firm characteristics. We find high franchise value firms are more profitable and franchise value tends to be persistent. Moreover, we test if franchise value effects vary across heterogeneous environments. We find the effect of franchise value is weakened in soft markets and for insurers that operate in more competitive sectors. Franchise Value and Insurer Performance