Risk management and the cost of equity: evidence from the United Kingdom’s non-life insurance market

Vineet Upreti, Mike Adams and Yihui Jia

The European Journal of Finance, 2022, vol. 28, issue 6, 551-570

Abstract: We investigate the effect of risk management (reinsurance) on the corporate cost of equity using panel data drawn from the United Kingdom’s (UK) non-life insurance industry. Our results show that use of reinsurance lowers the cost of equity but that the relation is non-linear. We find that the rate of reduction declines as the level of premiums ceded relative to total gross premiums written increases. We also find that the reinsurance-cost of equity relation is moderated by the risk of financial distress/bankruptcy. This moderating relation is robust to the use of three alternative measures of financial distress and bankruptcy risk.

Date: 2022
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DOI: 10.1080/1351847X.2021.1936588

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