The Costs and Benefits of Reinsurance
Purchasing reinsurance reduces insurers’ insolvency risk by stabilizing loss experience, increasing capacity, limiting liability on specific risks, and/or protecting against catastrophes. Consequently, reinsurance purchase should reduce capital costs. However, transferring risk to reinsurers is expensive. The cost of reinsurance for an insurer can be much larger than the actuarial price of the risk transferred. In this article, we analyze empirically the costs and the benefits of reinsurance for a sample of U.S. property-liability insurers. The results show that reinsurance purchase increases significantly the insurers’ costs but reduces significantly the volatility of the loss ratio. With purchasing reinsurance, insurers accept to pay higher costs of insurance production to reduce their underwriting risk.
|Date of creation:||Jun 2008|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (514) 340-6463
Fax: (514) 340-6469
Web page: http://www.hec.ca/iea/
More information through EDIRC
|Order Information:|| Postal: Institut d'économie appliquée HEC Montréal 3000, Chemin de la Côte-Sainte-Catherine Montréal, Québec H3T 2A7|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Froot, Kenneth A., 2001.
"The market for catastrophe risk: a clinical examination,"
Journal of Financial Economics,
Elsevier, vol. 60(2-3), pages 529-571, May.
- Kenneth A. Froot, 2001. "The Market for Catastrophe Risk: A Clinical Examination," NBER Working Papers 8110, National Bureau of Economic Research, Inc.
- Kenneth A. Froot, 1999. "The Market for Catastrophe Risk: A Clinical Examination," NBER Working Papers 7286, National Bureau of Economic Research, Inc.
- Marek Kaluszka & Andrzej Okolewski, 2008. "An Extension of Arrow's Result on Optimal Reinsurance Contract," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 75(2), pages 275-288.
- Berger, Allen N. & Humphrey, David B., 1997.
"Efficiency of financial institutions: International survey and directions for future research,"
European Journal of Operational Research,
Elsevier, vol. 98(2), pages 175-212, April.
- Allen N. Berger & David B. Humphrey, 1997. "Efficiency of Financial Institutions: International Survey and Directions for Future Research," Center for Financial Institutions Working Papers 97-05, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Allen N. Berger & David B. Humphrey, 1997. "Efficiency of financial institutions: international survey and directions for future research," Finance and Economics Discussion Series 1997-11, Board of Governors of the Federal Reserve System (U.S.).
- Richard D. Phillips & J. David Cummins & Franklin Allen, 1996. "Financial Pricing of Insurance in the Multiple Line Insurance Company," Center for Financial Institutions Working Papers 96-09, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Adams, Mike & Hardwick, Philip & Zou, Hong, 2008. "Reinsurance and corporate taxation in the United Kingdom life insurance industry," Journal of Banking & Finance, Elsevier, vol. 32(1), pages 101-115, January.
- Dionne, Georges & Gagne, Robert & Vanasse, Charles, 1998.
"Inferring technological parameters from incomplete panel data,"
Journal of Econometrics,
Elsevier, vol. 87(2), pages 303-327, September.
- Dionne, G. & Gane, R. & Vanasse, C., 1995. "Infessing Technological Parameters from Incomplete Panel Data," Cahiers de recherche 9537, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
- Dionne, G. & Gane, R. & Vanasse, C., 1995. "Infessing Technological Parameters from Incomplete Panel Data," Cahiers de recherche 9537, Universite de Montreal, Departement de sciences economiques.
- Ursina B. Meier & J. François Outreville, 2006. "Business cycles in insurance and reinsurance: the case of France, Germany and Switzerland," Journal of Risk Finance, Emerald Group Publishing, vol. 7(2), pages 160-176, March.
- Cassandra R. Cole & Kathleen A. McCullough, 2006. "A Reexamination of the Corporate Demand for Reinsurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(1), pages 169-192.
- J. David Cummins & Mary A. Weiss, 1998. "Analyzing Firm Performance in the Insurance Industry Using Frontier Efficiency Methods," Center for Financial Institutions Working Papers 98-22, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Hoerger, Thomas J & Sloan, Frank A & Hassan, Mahmud, 1990. " Loss Volatility, Bankruptcy, and the Demand for Reinsurance," Journal of Risk and Uncertainty, Springer, vol. 3(3), pages 221-45, September.
- Doherty, Neil A & Dionne, Georges, 1993. " Insurance with Undiversifiable Risk: Contract Structure and Organizational Form of Insurance Firms," Journal of Risk and Uncertainty, Springer, vol. 6(2), pages 187-203, April.
When requesting a correction, please mention this item's handle: RePEc:iea:carech:0804. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Patricia Power)
If references are entirely missing, you can add them using this form.