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The Costs and Benefits of Reinsurance

John Cummins (), Georges Dionne, Robert Gagné () and Abdelhakim Nouira
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Robert Gagné: IEA, HEC Montréal, http://www.hec.ca/iea/

No 08-04, Cahiers de recherche from HEC Montréal, Institut d'économie appliquée

Abstract: Purchasing reinsurance reduces insurers’ insolvency risk by stabilizing loss experience, increasing capacity, limiting liability on specific risks, and/or protecting against catastrophes. Consequently, reinsurance purchase should reduce capital costs. However, transferring risk to reinsurers is expensive. The cost of reinsurance for an insurer can be much larger than the actuarial price of the risk transferred. In this article, we analyze empirically the costs and the benefits of reinsurance for a sample of U.S. property-liability insurers. The results show that reinsurance purchase increases significantly the insurers’ costs but reduces significantly the volatility of the loss ratio. With purchasing reinsurance, insurers accept to pay higher costs of insurance production to reduce their underwriting risk.

Keywords: reinsurance; insolvency risk; risk management; financial intermediation; cost functions; panel data. (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk, nep-ias and nep-rmg
Date: 2008-06
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Persistent link: https://EconPapers.repec.org/RePEc:iea:carech:0804

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