Hedge the Hedgers: Usage of Reinsurance and Derivatives by Property and Casualty Insurance Companies

37 Pages Posted: 28 May 2008 Last revised: 20 Apr 2014

See all articles by Qingyi (Freda) Song Drechsler

Qingyi (Freda) Song Drechsler

University of Pennsylvania - Wharton Research Data Services

J David Cummins

Temple University - Risk Management & Insurance & Actuarial Science

Date Written: February 29, 2008

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.

Keywords: Hedging, Derivatives, Insurance, Reinsurance

JEL Classification: G22, D21, G39

Suggested Citation

Drechsler, Qingyi (Freda) Song and Cummins, J. David, Hedge the Hedgers: Usage of Reinsurance and Derivatives by Property and Casualty Insurance Companies (February 29, 2008). Available at SSRN: https://ssrn.com/abstract=1138028 or http://dx.doi.org/10.2139/ssrn.1138028

Qingyi (Freda) Song Drechsler (Contact Author)

University of Pennsylvania - Wharton Research Data Services ( email )

3819 Chestnut St Suite 300A
St Leonard's Court
Philadelphia, PA 19104
United States

J. David Cummins

Temple University - Risk Management & Insurance & Actuarial Science ( email )

Fox School of Business and Management
1801 Liacouras Walk.
Philadelphia, PA 19122
United States
215-204-8468 (Phone)
215-204-4712 (Fax)

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