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The Sensitivity of Reinsurance Demand to Counterparty Risk: Evidence From the U.S. Property–Liability Insurance Industry

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  • Sojung Carol Park
  • Xiaoying Xie
  • Pinghai Rui

Abstract

This article investigates market discipline in the reinsurance market by examining the sensitivity of reinsurance demand to reinsurer counterparty risk for a sample of U.S. property–liability insurance companies. Using the financial strength rating of reinsurers as a proxy for reinsurance counterparty risk, we find evidence of market discipline that reinsurance demand is sensitive to counterparty risk. Specifically, reinsurance demand reacts negatively to reinsurer rating downgrades, with the reduction being the largest when a “weak” reinsurer gets “weaker,” followed by a reinsurer being downgraded below a benchmark rating. The sensitivity is higher for authorized reinsurance than for unauthorized reinsurance. Reinsurance demand sensitivity to counterparty risk is found to be lower for ceding insurers with higher leverage. Ceding insurers with high reinsurer sustainability are less sensitive to noncritical rating downgrades of reinsurers. Additionally, reinsurance demand is found to be less sensitive to reinsurer upgrading than to reinsurer downgrading.

Suggested Citation

  • Sojung Carol Park & Xiaoying Xie & Pinghai Rui, 2019. "The Sensitivity of Reinsurance Demand to Counterparty Risk: Evidence From the U.S. Property–Liability Insurance Industry," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 86(4), pages 915-946, December.
    • Handle: RePEc:bla:jrinsu:v:86:y:2019:i:4:p:915-946
    DOI: 10.1111/jori.12244
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    Cited by:

    1. Tobias Götze & Marc Gürtler, 2022. "Risk transfer beyond reinsurance: the added value of CAT bonds," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 47(1), pages 125-171, January.
    2. Jassem Alokla & Arief Daynes & Paraskevas Pagas & Panagiotis Tzouvanas, 2023. "Solvency determinants: evidence from the Takaful insurance industry," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 48(4), pages 847-871, October.
    3. Xiaoyi Li & Yung-Ming Shiu, 2021. "Reinsurance, debt capacity and financial flexibility," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 46(4), pages 664-687, October.

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