The Impact of Institutional Ownership on the Reinsurance Decision

Abstract

Risk management has a central role in corporate America. Insurance companies frequently manage risk by purchasing reinsurance because it reduces the downside risk (i.e., bankruptcy risk) of an insurer. Because reinsurance is costly, Mayers and Smith (1990, Journal of Business, 63: 19-40) argue that reinsurance purchases should be negatively associated with the diversification of the owners' portfolios. Further, institutional owners play a significant role in equity markets yet we know little about their effect on firm behavior. The purpose of this study is to examine empirically the influence of institutional ownership on reinsurance for a sample of widely held property-liability insurers. We hypothesize that insurers with higher levels of institutional ownership purchase less reinsurance. Using a sample of 45 publicly traded property-liability insurers from 1995 to 1997, we demonstrate that the utilization of reinsurance decreases as the level of institutional ownership increases. This suggests that the diversification of the owners' portfolios is a determinant of the insurers' reinsurance decisions.

Reinsurance and Capital Structure: Evidence From the United Kingdom Non-Life Insurance Industry

“…Business Mix Previous research on reinsurance (e.g., Shortridge and Avila, 2004; Cole and McCullough, 2006) considers the effects of lines of business on reinsurance to reflect risk differences across lines. I measure the proportions of net earned premiums written in each of the following six lines: accident and health, motor, marine aviation and transport, property, third‐party liability, and miscellaneous and pecuniary loss.…”

“…4 4 I rely on the reinsurance and capital structure literature (such as Hoerger, Sloan, and Hassan, 1990; Adams, 1996; Chen, Hamwi, and Hudson, 2001; Garven and Lamm‐Tennant, 2003; Shortridge and Avila, 2004; Cole and McCullough, 2006; Titman and Wessels, 1988; Kayhan and Titman, 2007) to identify the possible control variables. …”

“…13 13 Mayers and Smith (1990) and Shortridge and Avila (2004) suggest that ownership type/structure is a potential factor affecting the reinsurance decision. They argue that the more diversified the owners’ portfolios, the less the reinsurance purchases.…”

ORGANIZATION STRUCTUREAND CORPORATE DEMANDFOR REINSURANCE: THE CASEOFTHE JAPANESE KEIRETSU

“…They also find a negative impact of diversification of ownership on reinsurance demand in the U.S. non‐life insurance industry. Shortridge and Avila () observe that insurers with higher levels of institutional ownership purchase less reinsurance, consistent with institutional investors being well diversified. Regan and Hur () examine insurance demand and the proportion of the firm's equity held by majority shareholders or institutional owners.…”

A note on risk and value from an underutilized dataset: Consolidated disclosures

“…There are relatively few studies of insurers that analyze consolidated data. Examples are Napompech, Kroll, and Shelor (2002) who measure agency costs associated with a mutual insurer converting to stock; Born, Giaccotto and Ritsatos (2004) who examine the value created by stock repurchases of insurance firms; Shortridge and Avila (2004) who examine the impact of an insurer's institutional ownership on its use of reinsurance; Kanno (2016) who examines the structure of intercompany networks across the global insurance industry; and Scordis (2019) who identifies value drivers for PC insurance firms. It is proper, then, to consider what data one should use since what data are appropriate depends on what hypotheses one wishes to investigate within the risk‐value dynamic of an insurer.…”