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U.S. Reinsurance Prices, Financial Quality, and Global Capacity

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  • Mary A. Weiss
  • Joon‐Hai Chung

Abstract

The puzzle of underwriting cycles and insurance crises in property‐liability insurance has led to numerous economic hypotheses and analyses, yet no single theory seems capable of explaining all of its aspects. Reinsurance is hypothesized to be a potential factor in observed cycles in the primary market; despite this, few underwriting cycle studies focus on reinsurance. The purpose of this research is to investigate determinants of reinsurance prices in the U.S. Nonproportional reinsurance is highlighted, since it is designed to cover the tail of the loss distribution and is considered to be relatively riskier than proportional reinsurance as a result. Separate samples of professional U.S. reinsurers for property and for casualty are studied, based upon the reinsurers' writings of property versus casualty nonproportional reinsurance. The sample period is 1991–1995. The results support both the capacity constraint hypothesis and the risky debt hypothesis, and this is the first research to support both. A major innovation in this study is the use of capacity variables that are broken down by major region of the world.

Suggested Citation

  • Mary A. Weiss & Joon‐Hai Chung, 2004. "U.S. Reinsurance Prices, Financial Quality, and Global Capacity," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 71(3), pages 437-467, September.
    • Handle: RePEc:bla:jrinsu:v:71:y:2004:i:3:p:437-467
    DOI: 10.1111/j.0022-4367.2004.00098.x
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    Cited by:

    1. Georges Dionne & Denise Desjardins, 2022. "A re‐examination of the US insurance market's capacity to pay catastrophe losses," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 25(4), pages 515-549, December.
    2. J. David Cummins & Georges Dionne & Robert Gagné & Abdelhakim Nouira, 2021. "The costs and benefits of reinsurance," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 46(2), pages 177-199, April.
    3. Beer, Simone & Braun, Alexander & Marugg, Andrin, 2019. "Pricing industry loss warranties in a Lévy–Frailty framework," Insurance: Mathematics and Economics, Elsevier, vol. 89(C), pages 171-181.
    4. Byeongyong Paul Choi & Elyas Elyasiani, 2011. "Foreign-owned insurer performance in the US property-liability markets," Applied Economics, Taylor & Francis Journals, vol. 43(3), pages 291-306.
    5. Mohammad Nourani & Qian Long Kweh & Evelyn Shyamala Devadason & V.G.R. Chandran, 2020. "A decomposition analysis of managerial efficiency for the insurance companies: A data envelopment analysis approach," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 41(6), pages 885-901, September.
    6. Chia-Ling Ho & Gene Lai & Sangyong Han & Licheng Jin, 2022. "Organisational structure, corporate governance and reinsurance decisions in the U.S. property-liability insurance industry," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 47(4), pages 737-784, October.
    7. Zou, Bin & Cadenillas, Abel, 2014. "Explicit solutions of optimal consumption, investment and insurance problems with regime switching," Insurance: Mathematics and Economics, Elsevier, vol. 58(C), pages 159-167.
    8. Parente, Ronaldo & Choi, Byeongyong Paul & Slangen, Arjen H.L. & Ketkar, Sonia, 2010. "Distribution system choice in a service industry: An analysis of international insurance firms operating in the United States," Journal of International Management, Elsevier, vol. 16(3), pages 275-287, September.
    9. Dionne, Georges & Harrington, Scott, 2017. "Insurance and Insurance Markets," Working Papers 17-2, HEC Montreal, Canada Research Chair in Risk Management.
    10. Upreti, Vineet & Adams, Mike, 2015. "The strategic role of reinsurance in the United Kingdom’s (UK) non-life insurance market," Journal of Banking & Finance, Elsevier, vol. 61(C), pages 206-219.
    11. Giovanni Millo, 2016. "The Income Elasticity of Nonlife Insurance: A Reassessment," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 83(2), pages 335-362, June.
    12. Desjardins, Denise & Dionne, Georges & Koné, N’Golo, 2022. "Reinsurance demand and liquidity creation: A search for bicausality," Journal of Empirical Finance, Elsevier, vol. 66(C), pages 137-154.
    13. Sabine Lemoyne de Forges & Ruben Bibas & Stéphane Hallegatte, 2001. "A dynamic model of extreme risk coverage : Resilience and e fficiency in the global reinsurance market," CIRED Working Papers halshs-00800460, HAL.
    14. Milidonis, Andreas, 2013. "Compensation incentives of credit rating agencies and predictability of changes in bond ratings and financial strength ratings," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3716-3732.
    15. Ning Wang & Yiling Deng, 2016. "Market responses to loss shocks and insurers' post-catastrophe performance in the US property-casualty insurance market," International Journal of Economics and Business Research, Inderscience Enterprises Ltd, vol. 11(3), pages 231-246.
    16. W. J. W. Botzen & J. C. J. M. Van Den Bergh, 2008. "Insurance Against Climate Change and Flooding in the Netherlands: Present, Future, and Comparison with Other Countries," Risk Analysis, John Wiley & Sons, vol. 28(2), pages 413-426, April.
    17. Julien Hardelin & Sabine Lemoyne de Forges, 2012. "Raising Capital in an Insurance Oligopoly Market," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 37(1), pages 83-108, March.
    18. Patricia H. Born & Barbara Klimaszewski-Blettner, 2013. "Should I Stay or Should I Go? The Impact of Natural Disasters and Regulation on U.S. Property Insurers’ Supply Decisions," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 80(1), pages 1-36, March.
    19. Cassandra R. Cole & Kathleen A. McCullough, 2008. "A Comparative Analysis of U.S. Property and Casualty Reinsurers and Insurers," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 11(1), pages 179-207, March.
    20. Mathieu Gatumel & Sabine Lemoyne de Forges, 2013. "Understanding and Monitoring Reinsurance Counterparty Risk," Post-Print hal-00946934, HAL.
    21. Dionne, Georges & Desjardins, Denise, 2017. "Reinsurance Demand and Liquidity Creation," Working Papers 17-3, HEC Montreal, Canada Research Chair in Risk Management.
    22. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    23. Jean-François Outreville, 2014. "The Meaning of Risk? Insights from The Geneva Risk and Insurance Review," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 39(4), pages 768-781, October.

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