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

  • Selim Mankaï
  • Aymen Belgacem

Theory and empirical evidence recognize interactions between capital and risk. This paper analyzes the effect of reinsurance, as a new endogenous decision variable, on this policy mix using simultaneous equations model. Empirical results obtained from a sample of U.S. property-liability insurance firms reveal significant interactions between capital, risk, and reinsurance. The relationship between risk and capital is positive, highlighting the effectiveness of regulatory mechanisms. Reinsurance is negatively associated with capital, for which it appears to act as a substitute. These results are strongly sensitive to the level of capital held in excess of the regulatory minimum requirements. Weakly capitalized firms adjust their reinsurance and risk levels more extensively and try to rebuild an appropriate capital buffer. Unlike other decision variables, the capital ratio converges toward a target level.

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Paper provided by Department of Research, Ipag Business School in its series Working Papers with number 2014-154.

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Length: 27 pages
Date of creation: 25 Feb 2014
Date of revision:
Handle: RePEc:ipg:wpaper:2014-154
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