The gravity of insurance within the financial sector is constantly increasing. Reasonably, after the events of the recent financial turmoil, the domain of research that examines the factors driving the risk-taking of this industry has been signified. The purpose of the present study is to investigate the interplay between national culture and risk of insurance firms. We quantify the cultural overtones, measuring national culture considering the dimensions outlined by the Hofstede model and risk-taking using the ‘Z-score’. In a sample consisting of 801 life and non-life insurance firms operating across 42 countries over the period 2007–2016, we find a strong and significant relationship among insurance firms' risk-taking and cultural characteristics, such as individualism, uncertainty avoidance and power distance. Results remain robust to a variety of firm and country-specific controls, alternative measures of risk, sample specifications and tests designed to alleviate endogeneity.
“Differences in the way distinct countries subjectively value insurance products have not come into being by chance. Patterns of appreciation are part of the culture of a society.” Geert Hofstede (1995, p.423) Insurance is fast becoming an imperative element of the financial sector that significantly contributes to economic growth (Haiss & Sümegi, 2008). Understandably, this also makes it a significant vulnerability of the financial system that could potentially derail it, eventually leading to a negative impact on the whole economy (Das, Davies, & Podpiera, 2003; Harrington, 2009). Admittedly, this justifies policy-makers' motives to reform the regulatory framework of this industry (Gaganis, Liu, & Pasiouras, 2015), further promoting confidence in its soundness (Cummins, Rubio-Misas, & Vencappa, 2017). Investigating the risk-taking of this domain is of paramount importance, especially as to what the unravelled global financial crisis revealed (Tarashev, Borio, & Tsatsaronis, 2009). Consequently, a number of studies delve into the factors driving the risk of insurers, shedding ample light in many respects. The plethora of existing studies focuses on firm-specific determinants (see Chen & Wong, 2004, pp. 470–473, for a detailed review). Turning to the macro-level strand of literature that our study is addressed at, we find a limited number of prior studies. These consider country-specific characteristics, such as the quality of institutions (Fields, Gupta, & Prakash, 2012), regulations (Pasiouras & Gaganis, 2013) and competition (Cummins et al., 2017) as drivers of the industry's risk-taking. Arguably, these studies are greatly informative, yet far from being exhaustive. In particular, we find informal institutions, such as national culture - that has made its way through the literature over the past three decades (Kirkman, Lowe, & Gibson, 2006) - to be missing from the above explanatory list. Interestingly, anecdotal evidence and prior studies in the literature identify culture as a main determinant of financial institutions' stability. More specifically, a thought-provoking survey conducted by PricewaterhouseCoopers and The Economist's Intelligence Unit among financial services professionals in May 2008 reveals that 73% of the respondents identified “culture and excessive-risk taking” as the main drivers of the global financial crisis (PricewaterhouseCoopers, 2008).