Risk management in life insurance companies: Evidence from Taiwan

•This study examines relationship among investing risk, underwriting risk, and capital ratio.•The dataset contains 27–28 life insurance companies 2004–2009 in Taiwan.•The relationship between capital and underwriting risk is positive.•The relationship between investing risk and capital shows a reverse pattern.•Overall, the 2SQR provides stronger evidence than the 2SLS.

The solvency issue of life insurance companies has become more important in recent years as business risks turn increasingly greater. This study examines the relationship among investing risk, underwriting risk, and the capital ratio during the post risk-based capital regulation period of 2004–2009 in Taiwan. In addition to the two-stage least square regression (2SLS), we also adopt the two-stage quantile regression (2SQR) to capture the effects of low capital (or risk) levels and high capital (or risk) levels. 2SLS do not fully explain the capital-risk relation. Contrary to previous evidence reported in the U.S., our findings in 2SQR model indicate that the relationship between capital and underwriting risk is positive, while the relationship between investing risk and capital shows a reverse pattern. Overall, the 2SQR provides stronger evidence than the 2SLS.