infonet-economy

We analyze the interdependencies of the three main strategic goals of many companies: growth, profitability, and safety. Extant literature suggests that the relationships among these goals are reciprocal. Therefore, we develop a simultaneous equation model to empirically test three pairs of hypotheses simultaneously and over time considering a sample of 1,988 European insurance companies over eleven years. Our results suggest that moderate firm growth has a positive im-pact on profitability; however, extremely high growth reduces profitability. Moderate firm growth also tends to reduce risk. In addition, we find evidence that insurers with relatively low profitability are risk-seeking, a result in line with prospect theory. The analysis over time shows that insurers which initially prioritize profitability over growth are more likely to reach a state of “profitable growth” than vice versa. Our results emphasize the existing results on underwriting discipline and show that all three dimensions must be considered simultaneously and in a multi-period context to fully evaluate firm performance.