(Re)insurance and Diversification Inside P&C Insurers

We show that the combination of reinsurance and diversification strategies can improve the financial conditions of group-affiliated insurers. Analyzing P&C insurance companies in the United States, we find that firms purchasing huge reinsurance from affiliates while having a largely diversified business, do exhibit low expense ratios, are more profitable and financially solid. Moreover, we show that increasing external reinsurance (i.e. reinsurance from non- affiliates) together with wide geographical diversification decreases expense ratios too. These findings are in line with the hypothesis that “real service efficiencies†from reinsurance Mayers and Smith Jr (1990) would be more substantial if insurers are able to concentrate less of their risk within only a few lines of business or geographical areas. These insights are important to develop managerial strategies to face economic phases characterized by increasing reinsurance costs like we are currently experiencing.  JEL classification numbers: G22, G30, G32.