• Revisit the Corporate Demand for Property Insurance: Chinese Evidence

Abstract

This study investigates the corporate demand for property-liability insurance among 2,213 publicly listed firms in the People’s Republic of China (PRC) during the 2005-2006 period. Using the Heckman approach, we modeled demand as a binary consumption decision followed by a continuous choice of insurance volume, taken to be premiums scaled by physical assets. We compensated for the effects of sample selection by incorporating the Inverse Mills Ratio as an independent variable during the second stage. To interpret the output, it was necessary to compute the marginal effects of the explanatory variables, which were not equal to their estimated coefficients since both stages of the model were nonlinear. Empirical results show that leverage has no significant effect on the demand for insurance. Unlike previous researchers, we found that managerial ownership was negatively associated with the probability of purchasing insurance, state-owned corporations was positively associated with the demand for insurance, and firm size was negatively correlated with premium expenditures. In addition, while the coefficient of tax rate in the second stage is insignificant, its marginal effect is positively and significantly associated with premium expenditures. This result illustrates the importance of calculating marginal effects of explanatory variables. Simply relying on estimated coefficients may generate false conclusions.

Keywords: Demand for Insurance, Ownerships structure, Self-Selection