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THE REINSURANCE DECISION IN LIFE INSURANCE FIRMS: AN EMPIRICAL TEST OF THE RISK‐BEARING HYPOTHESIS
Author(s) -
Adams Mike
Publication year - 1996
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/j.1467-629x.1996.tb00296.x
Subject(s) - reinsurance , underwriting , actuarial science , business , life insurance , hedge , insurance industry , empirical research , economics , econometrics , statistics , ecology , biology , mathematics
Several explanations have been advanced in the financial economics literature to explain the reinsurance decision in insurance firms. Prominent amongst these is the risk‐bearing hypothesis which holds that reinsurance is motivated by the ability of residual claimants to effectively hedge against operational risk. Since the efficiency of risk‐bearing is influenced by organisational factors, such as ownership structure and firm size, the amount of reinsurance should also vary according to the characteristics of insurance firms. This study tests empirically the hypothesis that reinsurance is related to firm‐specific factors. Using 1988–1993 data gathered from New Zealand's life insurance industry, a fixed‐effects covariance regression model is estimated. Consistent with expectations, the results indicate that reinsurance is associated with smaller and more highly leveraged life insurance entities, and companies with greater underwriting risk. However, contrary to predictions, it also appears that it is stocks and companies with diversified production that tend to reinsure. The risk‐bearing hypothesis thus receives only partial support.