Academic journal article Risk Management and Insurance Review

A Comparative Analysis of U.S. Property and Casualty Reinsurers and Insurers

Academic journal article Risk Management and Insurance Review

A Comparative Analysis of U.S. Property and Casualty Reinsurers and Insurers

Article excerpt

ABSTRACT

In empirical research related to the property-casualty insurance industry, studies commonly focus on either insurers or reinsurers. However, in many cases, the definition used to make the distinction between the two groups is often not clearly defined and/or the definition varies across studies. This variation could result in a substantiaUy different group of firms being included or excluded from the study, thereby affecting the empirical results obtained. This study builds upon Chen and Hamwi, who compare the performance of U.S. insurers and reinsurers. The objective of the study is fourfold: (1) to compare the definitions of insurer and reinsurer commonly used in prior research to identify differences, (2) to expand upon the traditional methods of classifying insurers and reinsurers, (3) to compare the individual firm-level characteristics of insurers and reinsurers to detect potential variation across categories and across definitions, and (4) to analyze the impact of different definitions on the results of multivariate analyses exploring common research questions. The univariate results indicate that there are some variations in the characteristics of the firms based on the categorization of insurers and reinsurers arising from different definitions. In addition, we find that there are significant differences in the regression results when comparing models based on various definitions of reinsurers utilized in prior research and when professional reinsurers and incidental reinsurers are grouped together. As such, it is possible that the definition used to include or exclude reinsurers from the sample can impact the results.

INTRODUCTION

Property-casualty insurers have been used to test an assortment of financial economic hypotheses in an effort to provide answers to research questions in a variety of areas including corporate demand for insurance, solvency, and internationalization. Within these studies, it is common for authors to include only insurers (omitting reinsurers) or reinsurers (omitting insurers) in their samples. Limiting the sample to either insurers or reinsurers may be necessary in some cases due to the particular research question being considered or the specific area of the market being examined. However, in these studies, the definition of reinsurer or insurer varies significantly or in some cases is not clearly defined in the text of the article. This variation in the definitions used to distinguish a reinsurer from an insurer could result in a substantially different group of firms being included (or excluded) from these studies. As noted by Chen and Hamwi (2000), the nature of the transactions insurers and reinsurers are involved in is distinctly different in terms of the size of the contracts and the level of risk involved. These firms also are likely to vary in terms of operational and financial characteristics. To the extent that these varying characteristics are substantial, this could ultimately affect the results obtained in empirical studies using samples of only insurers or only reinsurers.

In the first section of the study, we examine insurers and reinsurers to determine if there are significant observable differences in the financial health, firm-specific characteristics, and investment performance of property-casualty insurers by expanding on the work of Chen and Hamwi (2000). In that study, the authors provide an initial analysis of the differences between insurers and reinsurers based on a variety of characteristics. We extend Chen and Hamwi in several key ways. First, we consider an expanded hst of financial and operational characteristics to better reflect the spectrum of firm attributes commonly examined in studies. In addition, we provide a brief comparison of some of the definitions of professional reinsurer used in prior studies to Ulustrate the potential variation in sample size and characteristics. Finally, we introduce a more robust classification of insurers and reinsurers. …

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