Application of Structural Equation Modeling on the Linkage of Risk Management, Capital Management and Finanical Management for Insurance Industry

This study uses property/liability insurance industry as research sample to examine how risk management, financial management, and capital management are related to each another, thereby reflecting such interactions in the managerial decisions in the choice of derivative and reinsurance use, in the allocation of asset risks, in the determination of underwriting activities as well as liability risks, and in the adequacy of capital levels. This study contributes to the literature by adopting structural equation modeling (SEM) to examine the direct effects from regulations on capital management, financial management, and risk management as well as the interacted effects of the three managerial decisions. As a result, the net effects of risk management, capital management, and financial management are reflected in the observable managerial decisions on the implementation of derivatives in managing risks, the allocation in bond and stock investment, and the adoption of debt and equity.