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Reinsurance and Liquidity: Evidence from the United Kingdom General Insurance Industry

Author

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  • Hui-Hsuan Liu

    (Department of Business Administration, National Cheng Kung University, 1, University Road, Tainan 701, Taiwan. E-mails: mimi73718@gmail.com; tcliu@mail.ncku.edu.tw)

  • Yung-Ming Shiu

    (Department of Risk Management and Insurance, Risk and Insurance Research Center, College of Commerce, National Chengchi University, 64, Sec. 2, Zhinan Road, Wenshan District, Taipei 11605, Taiwan.)

  • Tsung-Chi Liu

    (Department of Business Administration, National Cheng Kung University, 1, University Road, Tainan 701, Taiwan. E-mails: mimi73718@gmail.com; tcliu@mail.ncku.edu.tw)

Abstract

This paper aims to simultaneously examine the effect of liquidity on reinsurance use and the reverse causality of reinsurance on liquidity. Using a sample of U.K. general insurers from 1994 to 2011, we find that insurers with higher liquidity tend to purchase more reinsurance, and those with higher reinsurance dependence tend to maintain higher liquidity. Our data indicates that the cash-constraint argument dominates the substitution argument. We further find an inverted U-shaped relation between reinsurance and liquidity. Particular attention should be paid to the less liquid insurers that purchase less reinsurance because they have both less underwriting and liquidity risk management, and thus are exposed to a higher level of insolvency risk.

Suggested Citation

  • Hui-Hsuan Liu & Yung-Ming Shiu & Tsung-Chi Liu, 2016. "Reinsurance and Liquidity: Evidence from the United Kingdom General Insurance Industry," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 41(2), pages 307-324, April.
    • Handle: RePEc:pal:gpprii:v:41:y:2016:i:2:p:307-324
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    Citations

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    Cited by:

    1. 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.
    2. Dionne, Georges & Desjardins, Denise, 2017. "Reinsurance Demand and Liquidity Creation," Working Papers 17-3, HEC Montreal, Canada Research Chair in Risk Management.
    3. Nicos Scordis, 2020. "A note on risk and value from an underutilized dataset: Consolidated disclosures," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 23(1), pages 105-112, March.
    4. 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.
    5. Sana Sheikh & Ali Murad Syed & Syed Sikander Ali Shah, 2018. "Corporate Reinsurance Utilisation and Capital Structure: Evidence from Pakistan Insurance Industry," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 43(2), pages 300-334, April.
    6. GOCKOV, Gjorgi & KAMENJARSKA, Tanja, 2021. "Empirical Analysis Of The Factors Determining The Profitability Of Insurance Companies In The Republic Of North Macedonia," Studii Financiare (Financial Studies), Centre of Financial and Monetary Research "Victor Slavescu", vol. 25(1), pages 48-64, March.

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