This study is designed to investigate how the use of reinsurance affects the primary insurers' profitability and pricing on their insurance products.
This study examines the impact of reinsurance on the insurers’ profitability using a two stage least square to control the endogeneity problem with a reinsurance variable. The study analyzes 11,894 firm-year observations between 2001 and 2009.
The study finds that the use of reinsurance in general has a negative impact on property/casualty insurers' performance. However, reinsurance obtained from affiliated firms has a positive impact on profitability, which supports the existence of internal capital markets in the insurance industry.
The finding of study implies that reinsurance transactions are used among affiliated insurers for not only managing underwriting risk and increasing underwriting capacity but also subsidizing capital through internal capital markets. In term of limitation, due to the availability of price data, this study uses only one insurance cycle of 9 years, albeit not weakening the findings.
Especially for non-affiliated insurers, the finding suggests that they need to find an alternative way to transfer underwriting risk without having to use costly reinsurance.
This paper directly investigates the impact of reinsurance utilization on insurers' profitability and pricing.
