A Reexamination of the Corporate Demand for Reinsurance

Abstract

This study examines the effect of the state of the international reinsurance market on the demand for reinsurance by U.S. insurers using data from the years 1993 through 2000. Both the overall demand for reinsurance and the utilization of foreign reinsurance by U.S. insurers are explored. In addition to supporting the findings of prior literature related to the traditional motives for the corporate demand for insurance, evidence indicates that the state of the U.S. reinsurance industry impacts the amount of reinsurance demanded by U.S. insurers. The study also investigates reasons why U.S. insurers utilize a reinsurance program composed of both U.S. and foreign reinsurers. The results indicate that the decision to utilize some percentage of foreign reinsurance is driven primarily by the financial and operational characteristics of the ceding company such as firm size, group affiliation, and organizational form. However, no support is found for the hypothesis that possible differences between the foreign and U.S. reinsurance markets impact the decision to utilize foreign reinsurance. Copyright The Journal of Risk and Insurance, 2006.

Demutualization and Demand for Reinsurance

“…16 We can put more restrictions on other variables such as single dummy, but it will reduce the matching sample size dramatically. 17 Mayers and Smith (1990); Garven and Lamm-Tennant (2003); Cole and McCullough (2006). 18 For example, D(reins_ratio(À3))¼(reinsurance ratio of year À3)À(reinsurance ratio of year À1).…”

“…30 The structure of a tax code affects insurers' demand for reinsurance. On the one hand, 21 Mayers and Smith (1990); Garven and Lamm-Tennant (2003); Cole and McCullough (2006). 22 Mayers and Smith (1990); Hoyt and Khang (2000); Garven and Lamm-Tennant (2003); Weiss and Chung (2004); Cole and McCullough (2006).…”

“…23 Garven and Lamm-Tennant (2003). 24 Cole and McCullough (2006). 25 Many prior studies also use liabilities-to-equity as a proxy for bankruptcy.…”

“…25 Many prior studies also use liabilities-to-equity as a proxy for bankruptcy. For consistent comparison, we follow Cole and McCullough (2006) and use direct business written to surplus in this paper. 26 The variable equals the development of estimated losses and loss expenses incurred 2 years before the current and prior year, scaled by policyholders' surplus.…”

“…The data come from the 5-year historical page of the NAIC Property and Casualty Database. 27 Petroni (1992); Weiss (1985); Grace (1990); Christensen et al (1999); Gaver and Paterson (1999); Cole and McCullough (2006). 28 Other studies also use ROE (return on equity) or ROC (return on capital) to measure profitability.…”