Intangible Assets, Going-for-Broke and Asset Risk Taking of Property and Liability Insurance Firms

Intangible assets, known as franchise value in the insurance industry, are critical for insurance companies to acquire new business and survive the fierce market competition. In this study, we analyze how the incentives to protect intangible assets and to go for broke jointly affect their asset risk taking behavior of property and liability insurers. With a simple model, we demonstrate that insurers' incentive to protect their intangible assets gives rise to an inverse relation between intangible assets and asset risk. We also show that high-leverage insurers are less inclined to protect their intangible assets because they are more likely to go for broke. Our empirical findings support these predictions. We find that insurers' investment in risky assets and the volatility of asset portfolio are inversely related to intangible assets. In addition, consistent with the going-for-broke argument, high-leverage insurers' asset risk is less responsive to intangible assets than that of low-leverage insurers