Reinsurance Demand and Liquidity Creation: A Search for Bi-Causality

106 Pages Posted: 13 Jul 2020 Last revised: 1 Feb 2022

See all articles by Denise Desjardins

Denise Desjardins

University of Montreal - Center for Research on Transportation

Georges Dionne

HEC Montreal - Department of Finance

N'Golo Koné

Queen's University - Department of Economics

Date Written: January 20, 2022

Abstract

Our main objective is to establish reciprocal links between reinsurance demand and liquidity creation. Early articles propose that financial institutions enhance economic growth by creating liquidity in the economy. However, liquidity creation exposes firms to liquidity risk because they make themselves illiquid when they create liquidity in the economy. In the insurance industry, unexpected claims can be protected through reinsurance, which introduces a trade-off between the demand for reinsurance and the creation of liquidity. This trade-off can be significant for insurers that have fewer diversification opportunities. Our empirical results, from regularized GMM and ML-SEM estimation methods, show positive bicausal effects between liquidity creation and reinsurance demand for small insurers. The link between the two activities is not significant for large insurers. In all estimations, the standard GMM model is rejected. Our results may have policy implications for liquidity risk management.

Keywords: Reinsurance demand; liquidity creation; liquidity risk management; bicausality; GMM; ML-SEM; policy implication; insurer regulation.

JEL Classification: G20, G21, G22, G32, G38

Suggested Citation

Desjardins, Denise and Dionne, Georges and Koné, N'Golo, Reinsurance Demand and Liquidity Creation: A Search for Bi-Causality (January 20, 2022). Available at SSRN: https://ssrn.com/abstract=3631054 or http://dx.doi.org/10.2139/ssrn.3631054

Denise Desjardins

University of Montreal - Center for Research on Transportation ( email )

C.P. 6128, Succ. Centre-Ville
Montreal, Quebec H3C 3J7
Canada

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/

N'Golo Koné

Queen's University - Department of Economics ( email )

94 University Avenue
Kingston, Ontario K7L 3N6
Canada
514 652-1005 (Phone)

HOME PAGE: http://www.ngolokone.com

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