Reinsurance Networks and Their Impact on Reinsurance Decisions: Theory and Empirical Evidence

Journal of Risk and Insurance, Vol. 82, No. 3, pp. 531-569, 2015

43 Pages Posted: 3 Oct 2013 Last revised: 25 Jan 2016

See all articles by Yijia Lin

Yijia Lin

University of Nebraska at Lincoln - Department of Finance

Jifeng Yu

University of Nebraska-Lincoln

Manferd O. Peterson

University of Nebraska at Lincoln - Department of Finance

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Date Written: January 24, 2013

Abstract

This paper investigates the role of reinsurance networks in an insurer’s reinsurance purchase decision. Drawing on network theory, we develop a framework that delineates how the pattern of linkages among reinsurers determines three reinsurance costs (loadings, contagion costs, and search and monitoring costs) and characterizes an insurer’s optimal network structure. Consistent with empirical evidence based on longitudinal data from the U.S. property and casualty insurance industry, our model predicts an inverted U-shaped relationship between the insurer’s optimal percentage of reinsurance ceded and the number of its reinsurers. Moreover, we find that a linked network may be optimal ex ante even though linkages among reinsurers may spread financial contagion, supporting the model’s prediction regarding social capital benefits associated with network cohesion. Our theoretical model and empirical results have implications for other networks such as loan sale market networks and over-the-counter dealer networks.

Keywords: Reinsurance Costs, Optimal Network Structure, Network Centrality, Network Cohesion

Suggested Citation

Lin, Yijia and Yu, Jifeng and Peterson, Manferd O., Reinsurance Networks and Their Impact on Reinsurance Decisions: Theory and Empirical Evidence (January 24, 2013). Journal of Risk and Insurance, Vol. 82, No. 3, pp. 531-569, 2015, Available at SSRN: https://ssrn.com/abstract=2334565

Yijia Lin (Contact Author)

University of Nebraska at Lincoln - Department of Finance ( email )

Lincoln, NE 68588-0490
United States

Jifeng Yu

University of Nebraska-Lincoln ( email )

United States

Manferd O. Peterson

University of Nebraska at Lincoln - Department of Finance ( email )

Lincoln, NE 68588-0490
United States

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