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Evidence from Publicly Traded Insurance Firms of a Non-Linear Relation Between Liquidity and Reinsurance

Author

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  • Nicos Scordis

Abstract

In this study I investigate for a nonlinear relation between an insurer’s liquidity and its use of reinsurance. I view reinsurance within the context of why publicly traded firms hedge. Within this context, conceptual models of liquidity hedging and related empirical results offer conflicting evidence on the relation between a firm’s liquidity and hedging. In this study I use a broader conception of liquidity than prior studies have used, and control for endogeneity in the relation between liquidity and reinsurance. I use a panel on publicly traded insurers in the United States (US) from 2000 to 2021. The data is consolidated across the entire scope of an insurer’s operations. I find that the relation between an insurer’s ability to generate liquidity and its use of reinsurance is strong. This relation is nonlinear. Its inflection point, however, occurs at very high values of liquidity generation. I also find that a negative and linear relation between an insurer’s liquidity reservoir and its use of reinsurance moderates the nonlinear relation in the insurer’s ability to generate liquidity. [Key words: hedging, liquidity, reinsurance.] Classification codes: C12, C23, G22, G32, G34.

Suggested Citation

  • Nicos Scordis, 2023. "Evidence from Publicly Traded Insurance Firms of a Non-Linear Relation Between Liquidity and Reinsurance," Journal of Insurance Issues, Western Risk and Insurance Association, vol. 46(1), pages 1-29.
    • Handle: RePEc:wri:journl:v:46:y:2023:i:1:p:1-29
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