The costs and benefits of reinsurance

J. David Cummins (), Georges Dionne (), Robert Gagné () and Abdelhakim Nouira ()
Additional contact information
J. David Cummins: Temple University
Robert Gagné: HEC Montreal, Department of Applied Economics
Abdelhakim Nouira: HEC Montreal, Canada Research Chair in Risk Management

No 08-1, Working Papers from HEC Montreal, Canada Research Chair in Risk Management

Abstract: 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.

Keywords: Reinsurance; insolvency risk; risk management; financial intermediation; cost function; panel data (search for similar items in EconPapers)
JEL-codes: C34 C35 G21 G22 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2021-02-10
New Economics Papers: this item is included in nep-ias, nep-ore and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: The costs and benefits of reinsurance (2021)
Working Paper: The Costs and Benefits of Reinsurance (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:crcrmw:2008_001

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