The Effect of Incidental Reinsurance Assumption on Insurer Performance

Todd G. Griffith and Andre P. Liebenberg

North American Actuarial Journal, 2021, vol. 25, issue 4, 503-523

Abstract: This article empirically examines the profitability and risk implications of the supply of reinsurance by incidental reinsurers to unaffiliated insurers. For a sample of U.S. property–liability insurers that do not specialize in reinsurance, we find that the decision to assume a nontrivial amount of external reinsurance (from unaffiliated insurers) increases firm risk and decreases firm profitability. However, when we examine internal reinsurance assumption (from affiliated insurers) we find no evidence of a negative performance effect. The fact that the negative performance effect is confined to external reinsurance assumption suggests that asymmetric information is driving the increased risk and decreased profitability. Further analysis shows that reinsurers are able to mitigate the negative impact of information asymmetries by engaging in long-term contracting and by focusing their reinsurance assumption in fewer lines of business.

Date: 2021
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DOI: 10.1080/10920277.2020.1758152

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