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Determinants of Derivative Usage in the Life and General Insurance Industry: The Australian Evidence

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  • Marc De Ceuster

    (University of Antwerpen (UFSIA), Prinsstraat 13, B-2000, Antwerpen 1, Belgium;
    Deloite & Touche, Lange Lozanastraat 270, 2018 Antwerp, Belgium)

  • Liam Flanagan

    (Formerly of the School of Accounting, Banking and Finance, Griffith University, Nathan, Brisbane, Qld 4111, Australia)

  • Allan Hodgson

    (School of Accounting, Banking and Finance, Faculty of Commerce and Management, Griffith University, Nathan, Brisbane, Qld 4111, Australia)

  • Mohammad I. Tahir

    (School of Accounting, Banking and Finance, Faculty of Commerce and Management, Griffith University, Nathan, Brisbane, Qld 4111, Australia)

Abstract

Core business and financial market risks are not easily reduced by standard operating procedures in insurance companies. Derivatives theoretically provide a cost effective vehicle to hedge these risks. This paper provides an empirical analysis of the determinants of derivative usage as well as the extent of derivative usage in the Australian insurance industry in both life and general insurance companies for the period 1997–1999.Empirical results for the Australian life insurance industry in general confirm the findings of UK and US based research. However, the Australian general insurance industry does not appear to follow the conclusions of previous literature. Our results indicate that for life insurers, the determinants of derivative usage were size, leverage and reinsurance. For the general insurance industry the determinants were size and the extent of long tail lines of business written. As regards the determinants of the extent of derivative usage, these were size and asset-liability duration mismatches for life insurers. For the general insurance industry the determinants of the extent of derivative usage were size, the extent of long tail lines of business written, and the reporting year.

Suggested Citation

  • Marc De Ceuster & Liam Flanagan & Allan Hodgson & Mohammad I. Tahir, 2003. "Determinants of Derivative Usage in the Life and General Insurance Industry: The Australian Evidence," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 6(04), pages 405-431.
    • Handle: RePEc:wsi:rpbfmp:v:06:y:2003:i:04:n:s0219091503001146
    DOI: 10.1142/S0219091503001146
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    References listed on IDEAS

    as
    1. Bodnar, Gordon M. & Gebhardt, Günther, 1998. "Derivatives usage in risk management by U.S. and German non-financial firms: A comparative survey," CFS Working Paper Series 1998/17, Center for Financial Studies (CFS).
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    Cited by:

    1. Sinha, Pankaj & Sharma, Sakshi, 2016. "Derivative use and its impact on Systematic Risk of Indian Banks: Evidence using Tobit model," MPRA Paper 72251, University Library of Munich, Germany.
    2. Hong Zou & Min-Ming Wen & Charles Yang & Mulong Wang, 2012. "Underwriting and investment risks in the property-liability insurance industry: evidence prior to the 9–11 event," Review of Quantitative Finance and Accounting, Springer, vol. 38(1), pages 25-46, January.
    3. I Wayan Nuka Lantara, 2012. "The Use of Derivatives as a Risk Management Instrument: Evidence from Indonesian Non-Financial Firms," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 11(1), pages 45-62, June.
    4. Chuang-Chang Chang & Keng-Yu Ho & Yu-Jen Hsiao, 2018. "Derivatives usage for banking industry: evidence from the European markets," Review of Quantitative Finance and Accounting, Springer, vol. 51(4), pages 921-941, November.
    5. Liu, Hui-Hsuan & Chang, Ariana & Shiu, Yung-Ming, 2020. "Interest rate derivatives and risk exposure: Evidence from the life insurance industry," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).

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    More about this item

    Keywords

    Risk management; derivative usage; hedging; insurance companies;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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