The Impact of The Reinsurance Institute on The Financial Results of Insurance Companies

Abstract

Risk management is one of the biggest challenges for financial market participants, in particular for the insurance companies. To solve this problem, the regulator and the insurance market have created a number of institutions, one of which is the institution of reinsurance. Institutions contribute to the solution of problems arising due to the limited rationality and opportunism of participants of contract processes. By use of these institutions organizations have an opportunity to reduce the “ex post” and “ex ante” transaction costs associated with contracts. At the same time, institutions only determine the rules and goals. The organization’s tactics and the way of fulfilling the requirements are completely controlled by its leadership of all levels, which also defines the role of institutions in solving other important business tasks, such as ensuring its efficiency and sustainability. The sustainability and efficiency of the insurance business significantly depends on proper risk management. This study analyses how the use of reinsurance institution as a part of risk-management affects the financial results of insurance companies. The insured events specified in contracts may not occur during their validity period, and one can suppose that in the short-term perspective reinsurance generates mostly outgoing cash flows, which affect the efficiency, solvency and liquidity of the organization. So the aim of the study is to analyse the impact of reinsurance intensity estimated by the share of premium transferred to the reinsurer on the specific financial characteristics of Russian insurance business. As a result, it was revealed that in the short term the impact is significantly negative: the use of reinsurance leads to decrease in financial performance of domestic insurance organizations. This result, of course, does not diminish the significance of reinsurance for risk-management, but it should be taken into account within financial planning and actuarial activities. For completeness, the relationship of various financial indicators with efficiency, solvency and liquidity of insurance companies was also analysed. In particular, it was shown that a change in the influence strength of a number of financial management tools affect above mentioned characteristics. We also noted the need to consider the nonlinear nature of relationships between financial indicators used in study in processes of forecasting and management.