Loss Volatility, Bankruptcy, and the Demand for Reinsurance

Thomas J Hoerger, Frank Sloan and Mahmud Hassan

Journal of Risk and Uncertainty, 1990, vol. 3, issue 3, 45 pages

Abstract: Insurers in our model reinsure to lower the risk of bankruptcy. In the conceptual part of the study, we show that given bankruptcy cost, reinsurance may be demanded even if the insurer is risk-neutral. The model allows us to assess how the insurer's surplus, size, and volatility of losses affect the amount of reinsurance the insurer purchases. As predicted by our comparative statics analysis, we find empirically that property/casualty and medical malpractice insurers with higher prereinsurance loss volatility, lower surplus-to-premium ratios, and smaller sizes demand more reinsurance. Copyright 1990 by Kluwer Academic Publishers

Date: 1990
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