The “flight to quality,” global capacity and U.S. reinsurance prices

Abstract

The puzzle of underwriting cycles and insurance crises in property-liability insurance has led to numerous economic hypotheses and analyses, yet no single theory seems capable of explaining all of its aspects. Reinsurance is hypothesized to be a potential factor in observed cycles in the primary market; despite this, few underwriting cycle studies focusing on reinsurance exist. The purpose of this research is to apply two principal underwriting cycle theories: the capacity constraint and risky debt hypotheses, to non-proportional property and casualty reinsurance in the U.S. Non-proportional reinsurance is highlighted, since it is designed to cover the tail of the loss distribution and is considered to be relatively riskier than proportional reinsurance as a result. Two professional U.S. reinsurer samples are studied, one for property and one for casualty; U.S. reinsurers in each sample were chosen on the basis of their non-proportional property (casualty) writings. The sample period is 1991 to 1995. The results support both the capacity constraint hypothesis and the risky debt hypothesis, and this is the first research to do so. A major innovation in this study is the use of capacity variables that are broken down by major region of the world

Citation

Chung, J.-H. and Weiss, M.A. (2002), "The “flight to quality,” global capacity and U.S. reinsurance prices", Choi, J.J. and Powers, M.R. (Ed.) Global Risk Management: Financial, Operational, and Insurance Strategies (International Finance Review, Vol. 3), Emerald Group Publishing Limited, Leeds, pp. 171-205. https://doi.org/10.1016/S1569-3767(02)03015-7