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Interactions Between Risk-Taking, Capital, and Reinsurance for Property-Liability Insurance Firms

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  • Selim Mankai

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

  • Aymen Belgacem

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

Abstract

Theory and empirical evidence suggest short-run interactions between capital and risk. This paper analyzes the effects of reinsurance, as a new endogenous decision variable, on this policy mix. We examine this issue using a system of simultaneous equations applied to the U.S. property-liability insurance industry. The results identify significant interactions between capital, risk and reinsurance. The relationship between risk and capital is positive, indicating the effectiveness of regulatory mechanisms. Reinsurance is negatively associated with capital, for which it appears to act as a substitute. These results are sensitive to the level of capital held in excess of the regulatory minimum requirements. Weakly capitalized firms adjust their reinsurance and risk levels more quickly and try to rebuild an appropriate capital buffer. Unlike other decision variables, the capital ratio converges toward a long-run target level.

Suggested Citation

  • Selim Mankai & Aymen Belgacem, 2013. "Interactions Between Risk-Taking, Capital, and Reinsurance for Property-Liability Insurance Firms," Working Papers hal-04141190, HAL.
    • Handle: RePEc:hal:wpaper:hal-04141190
    Note: View the original document on HAL open archive server: https://hal.science/hal-04141190v1
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    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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