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Default Risk and the Cross-Section of UK Insurance Firms’ Returns

Author

Listed:
  • Mario Cerrato
  • Paolo Coccorese
  • Xuan Zhang

Abstract

In this paper, we use a novel data-set of UK public and non-public insurance firms between 1985-2014 to investigate the empirical relationship between insurance firm’s returns and default risk as well as between industry default risk and reinsurance activity. We investigate whether some important firm’s characteristics (particularly, size and reinsurance) can help us to understand that relationship. We employ a novel cross-sectional portfolio approach and, after splitting returns into underwriting and investment returns, find evidence that default risk is negatively related to firms’ returns, while it is closely related to size and reinsurance activities especially for small size firms. We also report empirical evidence showing that returns in the insurance industry are exposed to a common risk factor.

Suggested Citation

  • Mario Cerrato & Paolo Coccorese & Xuan Zhang, 2022. "Default Risk and the Cross-Section of UK Insurance Firms’ Returns," Working Papers 2022_07, Business School - Economics, University of Glasgow.
    • Handle: RePEc:gla:glaewp:2022_07
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    Keywords

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    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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