Post by Sapphire Capital on Aug 7, 2008 23:14:32 GMT 4
Hedge the Hedgers: Usage of Reinsurance and Derivatives by Property and Casualty Insurance Companies
Qingyi (Freda) Song
University of Pennsylvania - Wharton School
J. David Cummins
Temple University
December 2007
Abstract:
This paper studies the usage of two common hedging tools, reinsurance and derivatives, by property and casualty insurance companies. In a simple mean-variance efficient optimization model, the two hedging tools display substitutive effect when asset and liability do not display strong natural hedging. I verify this relationship using a six-year insurance company firm-level data on reinsurance usage and off-balance sheet derivative trading recorded between 2000 and 2005. Controlling for firm specific variables, such as size, return and credit rating, such substitution effect indeed exists in the insurance companies' hedging decisions under a two-stage simultaneous equation framework.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1138028_code513641.pdf?abstractid=1138028&mirid=3
Qingyi (Freda) Song
University of Pennsylvania - Wharton School
J. David Cummins
Temple University
December 2007
Abstract:
This paper studies the usage of two common hedging tools, reinsurance and derivatives, by property and casualty insurance companies. In a simple mean-variance efficient optimization model, the two hedging tools display substitutive effect when asset and liability do not display strong natural hedging. I verify this relationship using a six-year insurance company firm-level data on reinsurance usage and off-balance sheet derivative trading recorded between 2000 and 2005. Controlling for firm specific variables, such as size, return and credit rating, such substitution effect indeed exists in the insurance companies' hedging decisions under a two-stage simultaneous equation framework.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1138028_code513641.pdf?abstractid=1138028&mirid=3