Corporate Reinsurance Utilisation and Capital Structure: Evidence from Pakistan Insurance Industry

Abstract

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 risk-bearing 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.