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

Denise Desjardins (), Georges Dionne () and N’Golo Koné ()
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Denise Desjardins: HEC Montreal, Canada Research Chair in Risk Management
N’Golo Koné: University of Montreal, Department of Economics

No 20-1, Working Papers from HEC Montreal, Canada Research Chair in Risk Management

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.

Keywords: Reinsurance demand; liquidity creation; liquidity risk management; bicausality; GMM; ML-SEM; policy implication; insurer regulation. (search for similar items in EconPapers)
JEL-codes: C13 C18 C33 C58 G21 G22 (search for similar items in EconPapers)
Pages: 106 pages
Date: 2020-06-19, Revised 2022-01-20
New Economics Papers: this item is included in nep-ias
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Citations: View citations in EconPapers (4)

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Journal Article: Reinsurance demand and liquidity creation: A search for bicausality (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:crcrmw:2020_001

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