The Demand for Reinsurance: Theory and Empirical Tests

Garven, James R.; Lamm-Tennant, Joan

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The Demand for Reinsurance: Theory and Empirical Tests

Insurance and Risk Management, Vol. 7, No. 3, pp. 217-237, July 2003

23 Pages Posted: 24 Aug 1998 Last revised: 6 Jun 2011

See all articles by James R. Garven

James R. Garven

Baylor University - Department of Finance, Insurance & Real Estate

Joan Lamm-Tennant

affiliation not provided to SSRN

Date Written: June 4, 2011

Abstract

This paper investigates the valuation effects of reinsurance purchases in a contingent claims framework. The comparative statics of the model suggest that, other things held constant, the demand for reinsurance will be greater, 1) the higher the firm's leverage, 2) the lower the correlation between the firm's investment returns and claims costs, 3) for firms which write "longer-tail" lines of insurance, and 4) the more the firm concentrates its investments in tax-favored assets. These predictions are tested in an empirical analysis of the reinsurance behavior of U.S. property-liability insurance firms during the 1980's.

JEL Classification: G22

Suggested Citation: Suggested Citation

Garven, James R. and Lamm-Tennant, Joan, The Demand for Reinsurance: Theory and Empirical Tests (June 4, 2011). Insurance and Risk Management, Vol. 7, No. 3, pp. 217-237, July 2003, Available at SSRN: https://ssrn.com/abstract=6717