Is Reinsurance a Substitute for or a Complement to Derivative Usage? Evidence from the U.K. Non-Life Insurance Industry

Yung-Ming Shiu ()
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Yung-Ming Shiu: Department of Risk Management and Insurance, Risk and Insurance Research Center, College of Commerce, National Chengchi University, 64, Sec. 2, Zhinan Road, Wenshan District, Taipei 11605, Taiwan.

The Geneva Papers on Risk and Insurance - Issues and Practice, 2016, vol. 41, issue 1, 178 pages

Abstract: Reinsurance and derivatives are tools in general use by insurers as the means of hedging their respective underwriting and investment risks. The primary aim of this study is to examine the relationship between reinsurance and derivative usage, a relationship which is tested based on a data set on U.K. non-life insurers covering the years 1994–2011. Consistent with the “substitution” hypothesis, we find strong evidence of a tendency among insurers with higher dependence on reinsurance (derivatives) to exhibit less reliance on derivatives (reinsurance). This result lends support to the view that, when making their risk management decisions, managers of such insurers will seek to determine the overall risk exposure of the firm.

Date: 2016
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