The US Property and Liability Insurance Industry: Firm Size, Growth and Impact of Guaranty Fund

The longstanding Gibrat’ Law is tested for the U.S. Property and Liability (P-L) insurance market and the effects of guaranty fund system on the insurance prices are analyzed, using data sets for the years 1992 - 2000. First, based on a complete panel data and using Heckman’s (1979) two-stage methodology, this paper examines the relationship between corporate growth and firm size. Further, to check time varying results, the analysis is conducted for the different sample periods. The results of this paper strongly support Gibrat’s Law in the U.S. P-L insurance market for the sample periods. The determinants of firm characteristics on firm growth are also discussed. Second, this paper examines the impact of the guaranty fund system on insurance prices. Empirical analysis is taken on two different groups, small vs. large firms. Real value of guaranty fund and a lag of fund assessments are used along with company-specific variables in the price equation. The results indicate some effects of guaranty fund system on insurance prices for only small insurers. The implications of the results are also discussed.