Corporate Reinsurance Utilisation and Capital Structure: Evidence from Pakistan Insurance Industry
- PDF / 1,234,985 Bytes
- 35 Pages / 481.89 x 694.488 pts Page_size
- 98 Downloads / 172 Views
Corporate Reinsurance Utilisation and Capital Structure: Evidence from Pakistan Insurance Industry Sana Sheikha, Ali Murad Syedb and Syed Sikander Ali Shahc a
PhD Scholar, National College of Business Administration & Economics, Lahore, Pakistan. E-mail: [email protected] b Assistant Professor, College of Business Administration, Imam Abdulrahman Bin Faisal University, Dammam, Saudi Arabia. E-mail: [email protected] c PhD Scholar, University of Management & Technology, Lahore, Pakistan. E-mail: [email protected]
The core objective of this work was to define significant determinants of corporate reinsurance utilisation in the life and non-life insurance industries in Pakistan based on the corporate demand for insurance theory, the bankruptcy cost argument, the agency cost theory, the riskbearing hypothesis and the renting capital hypothesis. It also assessed which of these two insurance sectors has greater demand for reinsurance. Covering 33 insurance companies (6 life and 27 non-life insurance companies) over the period 2002–2012, the study outcomes show that some factors have a more significant impact on reinsurance purchases by insurance companies than others. Solvency risk, underwriting risk, firm performance, rate of interest and business mix are shown to be significant factors in defining the demand for reinsurance, but they influence reinsurance utilisation differently in the life and non-life branches. Only the variables firm size and inflation rate show similar results in both insurance branches in Pakistan, in contrast to the mixed outcomes generated by other variables of interest. The study further concluded that life insurance firms with high leverage levels lean more towards reinsurance purchases and solvency risk than non-life stock insurance firms operating in Pakistan. The Geneva Papers (2017). doi:10.1057/s41288-017-0063-2 Keywords: insurance; reinsurance; leverage; corporate demand theory; agency cost Article submitted 26 December 2016; accepted 16 June 2017
Introduction Insurance companies differ from other industries in that they, in return for premiums, issue insurance policies to policyholders and cover the latter’s risk if a pre-specified insured event occurs. The success of an insurer not only depends on charging its customers sufficient premiums to cover the levied costs but also on assuring timely payments of the insured claims. Insurance companies resort to risk-hedging activities1 to overcome the economic and financial stress arising from the capital market’s imperfections, and 1
Shiu (2016).
The Geneva Papers on Risk and Insurance—Issues and Practice
reinsurance is the most common mechanism they use. Wehrhahn2 defined reinsurance activity as a financial transaction through which the risk is transferred (ceded) from an insurer (cedant) to a reinsurer in exchange for a payment (reinsurance premium). Because insurance companies underwrite diversified risk exposures, it is they who bear the cost of reinsurance to mitigate their portfolio risks (the premium). The reins
Data Loading...
