The Determinants of the Reinsurance Decision by Life Insurance Companies

Abstract

Risk management is vital to any business including insurance companies, and reinsurance is the major risk management tool available to insurance companies. Insurance companies rely on reinsurance to manage underwriting risk, tax liability, and incentives to invest. This paper extends existing research by considering the decision to reinsure for life insurance companies in two ways. First, we analyze life insurance companies’ propensity to reinsure any amount of business. Then, for those companies that do reinsure, we analyze the extent of reinsurance by examining the proportion of reinsurance relative to the total amount of premiums. Using two cross sections of data for U.S. life insurance companies, we find measures of underwriting risk, tax incentives, and incentives to invest are significant determinants of both aspects of the reinsurance decision.