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The Demand For Reinsurance: Theory and Empirical Tests

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  • James R. GARVEN
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    Abstract

    This paper investigates the valuation effects of reinsurance purchases in a contingent claims framework. The comparative statics of the model suggest that, other things held constant, the demand for reinsurance will be greater, 1) the higher the firm's leverage, 2) the lower the correlation between the firm's investment returns and claims costs, 3) for firms which write "longer-tail" lines of insurance, and 4) the more the firm concentrates its investments in tax-favored assets. These predictions are tested in an empirical analysis of the reinsurance behavior of U.S. property-liability insurance firms during the 1980's.

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    File URL: http://128.118.178.162/eps/ri/papers/9507/9507002.pdf
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    File URL: http://128.118.178.162/eps/ri/papers/9507/9507002.ps.gz
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    Bibliographic Info

    Paper provided by EconWPA in its series Risk and Insurance with number 9507002.

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    Length: 26 pages
    Date of creation: 31 Jul 1995
    Date of revision:
    Handle: RePEc:wpa:wuwpri:9507002

    Note: Type of Document - PostScript; pages: 26; figures: none
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    Web page: http://128.118.178.162

    Related research

    Keywords: reinsurance; options; asymmetric taxes;

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    1. Doherty, N A & Tinic, S M, 1981. "Reinsurance under Conditions of Capital Market Equilibrium: A Note," Journal of Finance, American Finance Association, vol. 36(4), pages 949-53, September.
    2. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
    3. Brennan, M J, 1979. "The Pricing of Contingent Claims in Discrete Time Models," Journal of Finance, American Finance Association, vol. 34(1), pages 53-68, March.
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