The Costs and Benefits of Reinsurance

33 Pages Posted: 11 Jun 2008 Last revised: 11 Feb 2021

See all articles by J David Cummins

J David Cummins

Temple University - Risk Management & Insurance & Actuarial Science

Georges Dionne

HEC Montreal - Department of Finance

Robert Gagné

HEC Montreal - Institute of Applied Economics

Abdelhakim Nouira

HEC Montreal - Department of Finance

Date Written: February 10, 2021

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.

Keywords: Reinsurance, insolvency risk, risk management, financial intermediation, cost function, panel data.

JEL Classification: C34, C35, G21, G22

Suggested Citation

Cummins, J. David and Dionne, Georges and Gagné, Robert and Nouira, Abdelhakim, The Costs and Benefits of Reinsurance (February 10, 2021). Available at SSRN: https://ssrn.com/abstract=1142954 or http://dx.doi.org/10.2139/ssrn.1142954

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)

Georges Dionne (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-6596 (Phone)
514-340-5019 (Fax)

HOME PAGE: http://www.hec.ca/gestiondesrisques/

Robert Gagné

HEC Montreal - Institute of Applied Economics ( email )

3000, ch. de la Côte-Ste-Catherine
Montréal, Quebec H3T 2A7
Canada

Abdelhakim Nouira

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

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