The effects of business mix on internal and external reinsurance usage

Ching-Yuan Hsiao and Yung-Ming Shiu ()
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Ching-Yuan Hsiao: Tamkang University
Yung-Ming Shiu: National Chengchi University

The Geneva Papers on Risk and Insurance - Issues and Practice, 2019, vol. 44, issue 4, No 4, 624-652

Abstract: Abstract Our overall aim in this research is to identify the effects of the business mix of insurers on their overall reinsurance usage, based on the use of the Cragg (Econometrica 39:829–844, 1971) model, for our analysis of the reinsurance decisions made by insurers in the U.K. life insurance industry between 2005 and 2014. Our findings reveal a positive (negative) correlation between with-profit (unit-linked) business and reinsurance, thereby indicating that insurers underwriting riskier product mixes have a higher demand for reinsurance. We go on to separate total reinsurance into internal and external reinsurance before carrying out further analyses. Our results reveal that insurers underwriting more with-profit business appear to use more internal reinsurance, which would seem to imply that internal reinsurance could be more cost effective for those reinsurance transactions involving greater managerial discretion.

Keywords: Finite risk paradigm; Risk-bearing hypothesis; Managerial discretion; Internal reinsurance; External reinsurance (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1057/s41288-019-00138-6

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