The relationship between insurer solvency and reinsurance: evidence from the Taiwan property-liability insurance industry

Abstract

This study examines the relationship between insurer solvency and reinsurance. Taiwan provides an interesting environment for studying this issue with its relatively shallow market and natural catastrophe risk in the property-liability (P/L) insurance industry. The results of this investigation suggest that insurer solvency and reinsurance are interdependent. I find that insurers with higher solvency tend to purchase more reinsurance, and insurers with higher reinsurance dependence tend to have a higher level of solvency. Other empirical results show that underwriting risks, business concentration, return on investment (ROI) and business mix have a significant impact on reinsurance. Furthermore, I also find that insurers used less reinsurance after the RBC regime. In addition, firm size, return on asset (ROA), ROI, marine insurance, financial holdings and listed firms have a significant influence on an insurer's solvency. My results have practical implications for the P/L insurance industry and competent authorities in Taiwan.