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Reinsurance demand and liquidity creation: A search for bi-causality

Author

Listed:
  • Denise Desjardins

    (HEC Montreal, Canada Research Chair in Risk Management)

  • Georges Dionne

    (HEC Montreal, Canada Research Chair in Risk Management)

  • N’Golo Koné

    (University of Montreal, Department of Economics)

Abstract

Our main objective is to establish reciprocal links between reinsurance demand and liquidity creation. Early articles propose that financial institutions enhance economic growth by creating liquidity in the economy. However, liquidity creation exposes firms to liquidity risk because they make themselves illiquid when they create liquidity in the economy. In the insurance industry, unexpected claims can be protected through reinsurance, which introduces a trade-off between the demand for reinsurance and the creation of liquidity. This trade-off can be significant for insurers that have fewer diversification opportunities. Our empirical results, from regularized GMM and ML-SEM estimation methods, show positive bicausal effects between liquidity creation and reinsurance demand for small insurers. The link between the two activities is not significant for large insurers. In all estimations, the standard GMM model is rejected. Our results may have policy implications for liquidity risk management.

Suggested Citation

  • Denise Desjardins & Georges Dionne & N’Golo Koné, 2020. "Reinsurance demand and liquidity creation: A search for bi-causality," Working Papers 20-1, HEC Montreal, Canada Research Chair in Risk Management.
    • Handle: RePEc:ris:crcrmw:2020_001
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    Cited by:

    1. Georges Dionne & Denise Desjardins, 2022. "A re‐examination of the US insurance market's capacity to pay catastrophe losses," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 25(4), pages 515-549, December.
    2. Pana, Elisabeta, 2023. "A bibliometric review of liquidity creation," Research in International Business and Finance, Elsevier, vol. 64(C).
    3. Georges Dionne & Akouété Fenou & Mohamed Mnasri, 2023. "Consolidation of the US property and casualty insurance industry: Is climate risk a causal factor for mergers and acquisitions?," Working Papers 23-1, HEC Montreal, Canada Research Chair in Risk Management.

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    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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