Ownership Structure and Reinsurance Decisions: Evidence from the Property Casualty Insurance Industry in China

Abstract

This study examines the impact of ownership structure on reinsurance decisions in the Chinese property casualty insurance industry. The evidence shows that foreign insurers have higher reinsurance demand than domestic insurers. Specifically, foreign insurers are more likely to purchase volunteer reinsurance. More important, foreign insurers are associated with a higher percentage of facultative reinsurance ratios than domestic insurers. We also find that the insurer’s return on assets (ROA) is positively related to reinsurance demand, whereas firm size and tax shield are negatively related to reinsurance demand. Implementing the compulsory (statutory) reinsurance ratio in the Chinese insurance market before 2006 was inefficient. Finally, the regulation of compulsory reinsurance ratios affected the reinsurance demand before 2006. Insurers purchased more reinsurance before 2006 than after 2006 because of compulsory reinsurance. The overall results of this study indicate that ownership structure (foreign versus domestic ownership) and other characteristics of firms significantly affect the demand for reinsurance.