The determinants of reinsurance in the Swedish property fire insurance market during the interwar years, 1919-39
Drawing a framework from agency theory, we use a panel data design to examine the factors motivating the level of demand for reinsurance in the rapidly developing Swedish property fire insurance market during the interwar period 1919-39. We find that as hypothesised, reinsurance enabled Swedish fire insurers to mitigate underwriting and solvency risks and thus increased their capacity to underwrite new business in uncertain economic times. This in turn helped to increase the supply of indemnity coverage for property (buildings) fire risks in the Swedish insurance market. We also find that as expected, investment earnings are inversely related to reinsurance purchases. However, contrary to what was hypothesised, reinsurance appears to be positively related to liquidity levels, suggesting that over our period of analysis, fire insurers could have been reinsuring to 'protect' earnings and accumulated cash reserves therefore enabling investment opportunities to be realised. Analysis of the sub-period 1919-28 further supports this contention, while our results for the economic depression years after 1929 show that reinsurance helped mitigate underwriting and insolvency risks, suggesting that the reinsurance decision of fire insurance companies could be motivated by macroeconomic factors.
Volume (Year): 52 (2010)
Issue (Month): 2 ()
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