Does reinsurance affect capital structure deviations? Evidence from US property–casualty insurers

Xiaoyi Li () and Yung-Ming Shiu ()
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Xiaoyi Li: Southwestern University of Finance and Economics
Yung-Ming Shiu: National Chengchi University

The Geneva Papers on Risk and Insurance - Issues and Practice, 2025, vol. 50, issue 4, No 7, 905 pages

Abstract: Abstract This study explores the effect of hedging on capital structure deviations by examining whether and how reinsurance affects the capital structure deviation of both underleveraged and overleveraged insurers. Although previous research findings indicated that risk management tools increase actual leverage, we discover that reinsurance, a commonly used risk management tool for property–casualty insurers, is associated with reduced absolute values of actual and target leverage deviations. Our findings suggest that reinsurance moves an insurer’s actual leverage towards its target leverage. Our difference-in-differences analysis using Hurricane Sandy, which devastated Atlantic regions in 2012, as an exogenous shock to reinsurance, is consistent with our main results. Additionally, we find that insurers with reinsurance exhibit a capital structure adjustment speed approximately 6.9% quicker than insurers without reinsurance.

Keywords: Reinsurance; Capital structure deviations; Actual leverage; Target leverage (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1057/s41288-025-00356-1

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