CORPORATE INSURANCE AND DEBT CAPACITY: EMPIRICAL EVIDENCE FROM ITALY

CORPORATE INSURANCE AND DEBT CAPACITY: EMPIRICAL EVIDENCE FROM ITALY Santoboni F., Vento G.A., Porretta P.

Agenda 1. Introduction 2. Investigation guidelines 3. Key Results: comments and analysis 4. Conclusions

Introduction Fundamental role of Basel 2 in the bank-firm relationship: • It correlates more punctually the capital absorbtion with the risks faced by banks, thanks to more precise and rigorous techniques for credit risk assessment; • within CRM, guarantees have a pivotal role, especially those “eligible” (or “compliant”), among which it is possible to include also two insurance policies: • Life insurance policies; • Insurance guarantees. • However: • compliant policies do not reduce the borrower’s risk, but they increase the recovery capability of the bank in case of default of the borrower; • The risk reduction can be obtained through an insurance umbrella, which has to face both direct and undirect damages. …therefore… …if it is possible to recognise the ‘therapeutical ‘role of firms’ policies…. …there is a relationship between the level of insurance coverage and the increase of firm’s financing by banks

Agenda 1. Introduction 2. Investigation Guidelines • Goal and steps of the research • Literature review • Methodology • - The samples • - The questionnaires 3. Key Results: comments and analysis 4. Conclusions

Investigation Guidelines LITERATURE REVIEW METHODOLOGY GOAL QUESTIONNAIRES SAMPLES To investigate on the existance of a virtuous relationship among the level of insurance coverage, credit risk and credit access Steps of the research: Literature review, starting from the the reasons why firms buy insurance cover Preparation of a questionnaire submitted to a sample of the main insurance companies in Italy addressed to identify their role in the relationships with firms and the insurance solutions offered Preparation of a questionnaire submitted to a sample of the main banks in Italy addressed to identify whether and how the presence of insurance policies is a factor to be considered in credit risk assessment of the borrower, which allows to have better credit conditions

Investigation Guidelines LITERATURE REVIEW SAMPLES GOAL QUESTIONNAIRES METHODOLOGY In the framework of the traditional bank-firm investigation area, limitad space has been devoted to the role that insurance system may have in supporting credit access Theoretical studies and emphirical analyses on corporate policies and their functions are limited Difficulties in collecting data on the propension of firms to underwrite insurance coverages: the most signifinant researches have been based on listed firms The obtained results do not allow to to have consistent outcomes In 19 among the most significant contributions in literature it seems that the purchase of insurance coverages is positively correlated with the following factors: dimension: usually direct relationship between firm dimension and purchase of insurance coverages ownership growth perspectives leverage Better credit access conditions

Investigation Guidelines LITERATURE REVIEW GOAL METHODOLOGY SAMPLES QUESTIONNAIRES In particular, an Ania/Irsa survey (2010) offers a picture on the propensity of Italian firms to use insurance services: sample: 2295 firms from all over Italy, 98,5% of them private firms, 59% of them based in the North, 19% in the Centre and 22% based in the South and islands, 85% of them controlled by one individual or a family. period: 2008-2009 low percentage of firms having an adequate insurance coverage: the vast majority of the sample does not have more than 3 policies; only 14 % has more than 5 policies Risks covered: fire, theft, robbery, public liabilities Scarce use of business interruption solutions no comunication to banks of the policies owned no request from banks on policies owned limited risk management culture of firms

Investigation Guidelines LITERATURE REVIEW GOAL METHODOLOGY QUESTIONNAIRES SAMPLES The “philosophy” of the paper is to investigate the point of view of banks and insurance companies about the virtuous relationship between the level of coverage, credit risk and credit access in absence of information and public databases, the investigation has been performed in the first semester 2012 by using a judgmental sampling Preparation and distribution of specific questionnaires for two selected samples of: insurance companies (insurance companies questionnaire) banks (banks questionnaire) Peculiarity of the judgmental sampling (that is a non-probabilitysamplingtechnique): the considered samples, although limited as far as number, can provide significative answers because they represent a large portion of the two markets.

Investigation Guidelines LITERATURE REVIEW SAMPLES QUESTIONNAIRES METHODOLOGY GOAL Among insurance companies, 40 players operating in Italy have been selected; they represent over 90% of the market Source: Ania, 2010. identikit of the ideal interviewed: Director of the commercial area 14 insurance groups 60% of Italian insurance market in 3 out of 14 examined cases, answers were not provided directly by the director of the commercial area, but by agents which were nevertheless able to provide exhaustive answers on the commercial policy of the group

Investigation Guidelines LITERATURE REVIEW SAMPLES GOAL QUESTIONNAIRES METHODOLOGY

Investigation Guidelines LITERATURE REVIEW GOAL METHODOLOGY SAMPLES QUESTIONNAIRES 40 Italian banks operationg have been selected. They represent over 90% of the market Source: in absence of public information similar to those available for insurance companies, we analysed the data on Italian banking industry provided by the Bank of Italy and those available in the banks’ balance sheets identikitofthe ideal interviewed: Director of the credit department 26 banks 42% of Italian market among the interviewed banks there are 2 very large, 1 big, 2 medium, 8 small and 13 very small.

Investigation Guidelines LITERATURE REVIEW SAMPLES QUESTIONNIARES GOAL METHODOLOGY Source: Bank of Italy, (2011), p. 288. Fonte: Our data processed on basis of Bank of Italy data and data from intermediary balance sheets Source: Bank of Italy, (2011), p. 288.

Investigation Guidelines LITERATURE REVIEW SAMPLES METHODOLOGY GOAL QUESTIONNAIRES In the preparation of the 2 analysis tools (questionnaire insurance companies and banks) the following aspect have been stressed: • limited number of questions • use of multiple-choice questions, mostly • adoption of a de Leeuw methodology, that is based on «sequential mixed-mode surveys» approach to verify the commercial strategy of insurance companies towards firms, considering that a more “advisoring” approach allows insurance companies a more efficient management of the different risks Research question in the insurance companies’ questionnaire to verify if and to what extent the presence of insurance covers is a factor considered in the determination of of firms’ creditworthiness, which also allows to have access to credits at better conditions. Research question in the banks’ questionnaires

Agenda 1. Introduction 2. Investigation guidelines 3. Key results: comments and analysis • Insurance companies’ questionnaires results • Banks’ questionnaires results 4. Conclusions

Key results: comments and analysis INSURANCE COMPANIES’ QUESTIONNAIRES RESULTS BANKS’ QUESTIONNAIRES RESULTS

Key results: comments and analysis BANKS’ QUESTIONNAIRES RESULTS INSURANCE COMPANIES’ QUESTIONNAIRES RESULTS

Agenda 1. Introduction 2. Investigation guidelines 3. Key Results: comments and analysis 4. Conclusion

Conclusion Although the degree of insurance coverage of firms is still limited, it is possible to identify an increasing «culture of risk management» In case the firm is unable to allocate specific financial and/or human resources (i.e. risk managers) for risk management, there are interesting spaces for insurance companies: from simple distributors of products to partnerships for planning the management of firms’ pure risks Cost/benefit analysis of insurance «umbrella»: an acceleration towards the use of insurance service would occur if firms actually can benefit from better credit access conditions Limited use of eligiblepolicies: With regards to firm policies: the supply of better credit conditions does not seem to depend on the degree of insurance cover of the firm (client), as the value of the SquaredCramér's V Statistic() is very close to zero a good element is represented by the fact that more than 60% of interviewed declared to consider the presence of firm policies for credit risk assessment Enrich the assessment models currently used dedicating more space to qualitative components, which integrating traditional information, allow to draw a more accurate picture of the borrower Sistematic use in credit scoring models of information concerning the presence of insurance policies

Contacts Fabrizio Santoboni Dipartimento di “Management” - Facoltà di Economia - “Sapienza” - Università di Roma, Via del Castro Laurenziano 9, 00161 Roma. Tel.: (+39) 06 49766446 - Fax: (+39) 06 4450079 - Mob.: (+39) 339 6905212 – E-mail: fabrizio.santoboni@uniroma1.it Gianfranco A. Vento Department of Accounting, Finance & Economics – Regent’s College, Regent’s Park, Inner Circle, London, NW1 4NS Tel.: (+44) 207 487 7774 E-mail: ventog@regents.ac.uk Pasqualina Porretta Dipartimento di “Management” - Facoltà di Economia - “Sapienza” - Università di Roma, Via del Castro Laurenziano 9, 00161 Roma. Mob.: (+39) 335 1525457 E-mail: pasqualina.porretta@uniroma1.it

CORPORATE INSURANCE AND DEBT CAPACITY: EMPIRICAL EVIDENCE FROM ITALY