Loss volatility, bankruptcy, and the demand for reinsurance

Thomas J. Hoerger, Frank A. Sloan, Mahmud Hassan

Research output: Contribution to journalArticlepeer-review

39 Scopus citations

Abstract

Insurers in our model reinsure to lower the risk of bankruptcy. In the conceptual part of the study, we show that given bankruptcy cost, reinsurance may be demanded even if the insurer is risk-neutral. The model allows us to assess how the insurer's surplus, size, and volatility of losses affect the amount of reinsurance the insurer purchases. As predicted by our comparative statics analysis, we find empirically that property/casualty and medical malpractice insurers with higher prereinsurance loss volatility, lower surplus-to-premium ratios, and smaller sizes demand more reinsurance.

Original languageEnglish (US)
Pages (from-to)221-245
Number of pages25
JournalJournal of Risk and Uncertainty
Volume3
Issue number3
DOIs
StatePublished - Sep 1990
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

Keywords

  • bankruptcy
  • loss volatility
  • malpractice insurance
  • reinsurance

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