Post by Sapphire Capital on Aug 12, 2008 20:26:41 GMT 4
The Costs and Benefits of Reinsurance
J. David Cummins
Temple University
Georges Dionne
HEC Montreal - Department of Finance
Robert Gagné
HEC Montreal - Institute of Applied Economics
Abdelhakim Nouira
HEC Montreal - Department of Finance
June 2008
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.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1142954_code49680.pdf?abstractid=1142954&mirid=2
J. David Cummins
Temple University
Georges Dionne
HEC Montreal - Department of Finance
Robert Gagné
HEC Montreal - Institute of Applied Economics
Abdelhakim Nouira
HEC Montreal - Department of Finance
June 2008
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.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1142954_code49680.pdf?abstractid=1142954&mirid=2