Reinsurance and Liquidity: Evidence from the United Kingdom General Insurance Industry

Hui-Hsuan Liu, Yung-Ming Shiu () and Tsung-Chi Liu
Additional contact information
Hui-Hsuan Liu: Department of Business Administration, National Cheng Kung University, 1, University Road, Tainan 701, Taiwan. E-mails: mimi73718@gmail.com; tcliu@mail.ncku.edu.tw
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.
Tsung-Chi Liu: Department of Business Administration, National Cheng Kung University, 1, University Road, Tainan 701, Taiwan. E-mails: mimi73718@gmail.com; tcliu@mail.ncku.edu.tw

The Geneva Papers on Risk and Insurance - Issues and Practice, 2016, vol. 41, issue 2, 307-324

Abstract: This paper aims to simultaneously examine the effect of liquidity on reinsurance use and the reverse causality of reinsurance on liquidity. Using a sample of U.K. general insurers from 1994 to 2011, we find that insurers with higher liquidity tend to purchase more reinsurance, and those with higher reinsurance dependence tend to maintain higher liquidity. Our data indicates that the cash-constraint argument dominates the substitution argument. We further find an inverted U-shaped relation between reinsurance and liquidity. Particular attention should be paid to the less liquid insurers that purchase less reinsurance because they have both less underwriting and liquidity risk management, and thus are exposed to a higher level of insolvency risk.

Date: 2016
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