Default Risk and the Cross-Section of UK Insurance Firms’ Returns

Mario Cerrato, Paolo Coccorese and Xuan Zhang

Working Papers from Business School - Economics, University of Glasgow

Abstract: In this paper, we use a novel data-set of UK public and non-public insurance firms between 1985-2014 to investigate the empirical relationship between insurance firm’s returns and default risk as well as between industry default risk and reinsurance activity. We investigate whether some important firm’s characteristics (particularly, size and reinsurance) can help us to understand that relationship. We employ a novel cross-sectional portfolio approach and, after splitting returns into underwriting and investment returns, find evidence that default risk is negatively related to firms’ returns, while it is closely related to size and reinsurance activities especially for small size firms. We also report empirical evidence showing that returns in the insurance industry are exposed to a common risk factor.

Keywords: Economic growth; Risk; Insurance firms (search for similar items in EconPapers)
JEL-codes: G20 G23 G28 (search for similar items in EconPapers)
Date: 2022-06
New Economics Papers: this item is included in nep-cfn, nep-eec and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:gla:glaewp:2022_07

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