Primary Insurers Research Articles

The impact of reinsurance for insurance companies

The study provides empirical evidence for the effect of reinsurance on solvency, profitability, and taxes of primary insurers. Our main finding is that primary insurers increasing in the use of reinsurance exhibit lower capital ratios. This impact involves the segments of health insurance, composite insurance, title insurance, and non-life insurance. Our interpretation is that reinsurance and capital can be seen as substitutes for improving solvency. This implies that, by sharing their risk with reinsurers, primary insurers can benefit from a relief on capital. Additional outcomes display an important relationship between demand and supply of reinsurance at the firm level, as we observe that, growing in the used reinsurance; primary insurers are more prone to providing reinsurance to other firms.

The Microstructure of the US Property-Casualty Reinsurance Network: Performance Effects

Reinsurance is the primary source of interconnectedness in the insurance industry. As such, reinsurance connectivity provides a transmission mechanism for financial shocks and exposes insurers to contagion and potential systemic risk. In this paper, connectivity within the U.S. property-casualty (P/C) reinsurance market is modeled as a network. We extend the prior insurance network literature by modeling the network of all insurers in the market (primary insurers and reinsurers) not just primary insurers. We analyze all bilateral reinsurance counterparty relationships (domestic and foreign) of U.S. P/C insurers, and we model both intra- and inter-group transactions. Our analysis of contagion and insolvency risk reveals that even the failure of the top 10 in-degree or in-strength reinsurers with 100 percent loss given default would not lead to widespread insolvencies in the U.S. P/C insurance industry.

Measuring Quality of Neurosurgical Care: Readmission Is Affected by Patient Factors

The Hospital Readmission Reduction Program section of the Patient Protection and Affordable Care Act uses readmission rates as a proxy for measuring quality of care. Multiple studies have demonstrated that readmission rates are highly imprecise proxies for quality of care because readmission rates contain large amounts of statistical noise and are dependent on disease type, insurance type, severity, population, and a multitude of other factors. The current study was conducted to investigate characteristics associated with readmission and the quality of neurosurgical care. Admissions data were gleaned from the University Health System Consortium database for neurosurgical patient (both cranial and spine) readmissions to assess patient-related factors relating to readmission from January 2011 to December2014. Among 257,212 admissions for neurosurgical disease analyzed, patients with Medicaid and private payers as a primary insurance source had increased rates of readmission (odds ratio for readmission of 1.38 and 1.17, respectively) compared with patients with Medicare or other primary insurers. Patients with greater severity of disease and emergent or urgent admission also had statistically significant rates of readmission. The findings suggest that readmission is affected by patient factors that are beyond the control of treating physicians. These findings also suggest that readmission rates may not be a good proxy for measurement of quality of care in neurosurgical patients.

The strategic role of reinsurance in the United Kingdom’s (UK) non-life insurance market

Using panel data for five main lines of insurance in the United Kingdom’s (UK) non-life insurance market we demonstrate that by increasing the level of reinsurance, primary insurers increase their product-market share at the expense of less reinsured rivals. We also observe that the influence of reinsurance and other financial variables on insurers’ growth in product-market share differs across lines of insurance business. We conclude that reinsurance performs an important strategic function in insurance markets through its impact on product-market outcomes in competitive insurance markets. Additionally, we find that leverage is the most important factor affecting product-market share at the aggregate business level of the insurance firm.

Modelling clustering of natural hazard phenomena and the effect on re/insurance loss perspectives

Abstract. In this paper, we present a conceptual framework for modelling clustered natural hazards that makes use of historical event data as a starting point. We review a methodology for modelling clustered natural hazard processes called Poisson mixtures. This methodology is suited to the application we have in mind as it naturally models processes that yield cross-event correlation (unlike homogeneous Poisson models), has a high degree of tunability to the problem at hand and is analytically tractable. Using European windstorm data as an example, we provide evidence that the historical data show strong evidence of clustering. We then develop Poisson and Clustered simulation models for the data, demonstrating clearly the superiority of the Clustered model which we have implemented using the Poisson mixture approach. We then discuss the implications of including clustering in models of prices of catXL contracts, one of the most commonly used mechanisms for transferring risk between primary insurers and reinsurers. This paper provides a number of unique insights into the impact clustering has on modelled catXL contract prices. The simple modelling example in this paper provides a clear and insightful starting point for practitioners tackling more complex natural hazard risk problems.

The Structure of Reinsurance Contracts

Using a unique proprietary data set of primary insurers and reinsurers, we analyse the structure of the reinsurance market. The data, which spans six years, contains the quotes for different reinsurance layers, for different clients, for different treaties and for different lines of business. This is the first study that documents the actual structure of the global reinsurance market using actual quotes, not just the winning quote, for a large number of layers and a large number of reinsurance treaties.

Adverse Selection in Reinsurance Markets

This paper looks for evidence of adverse selection in the relationship between primary insurers and reinsurers. We test the implications of a model in which informational asymmetry—and therefore, its negative consequences—decline over time. Our tests involve a data panel consisting of U.S. property-liability insurance firms that reported to the National Association of Insurance Commissioners during the period 1993–2012. We find that the amount of reinsurance, insurer profitability, and insurer credit quality all increase with the tenure of the insurer–reinsurer relationship.

Introduction: Symposium on Convergence, Interconnectedness, and Crises: Insurance and Banking

A conference on Convergence, Interconnectedness, and Crises: Insurance and Banking was held at Temple University in Philadelphia from December 8 to 10, 2011. The conference was cosponsored by Temple University's Advanta Center for Research on Financial Institutions, SCOR Group, The Canada Research Chair in Risk Management, HEC Montreal, CIRPEE (Quebec, Canada), and The Journal of Risk and Insurance. Seventeen research papers and two keynote addresses were presented at the conference, and six papers from the conference are published in this symposium. The conference key note addresses were delivered by Denis Kessler, Chairman and CEO of SCOR Group, and Andrew W. Lo, Harris & Harris Group Professor of Finance, MIT Sloan School of Management. The Financial Crisis of 2007-2010 revealed significant interrelationships both within and between the insurance and banking industries that contributed significantly to the magnitude of the crisis and the resulting government bailout. The need for additional research on interconnectedness provided the motivation for the Conference. The objective was to help minimize or avoid future crises through careful scholarly explorations of these interconnections. Researchers from around the world spent 3 days delving into numerous insurance and banking topics, ranging from systemic risk to implications of financial services mergers to extreme correlations within the insurance industry. The introductory article in this symposium, by Denis Kessler, is based on his keynote speech at the Conference. In his article, Kessler argues that the (re)insurance industry is not a significant source of systemic risk. Kessler emphasizes that (re)insurance failures are very rare, orderly, long-term processes, unlike banking crises, which are short term and associated with panics. He points out that a failing (re)insurance company does not terminate its contracts overnight but continues to settle claims. Thus, (re)insurance failures do not require sudden liquidation of assets and liabilities, as in the case of many banking failures. One reason that banks are susceptible to systemic risk is the interbank lending market, where risk is strongly concentrated due to a network of very short-term, bilateral exposures. In contrast, the structure of the (re)insurance market is hierarchical, in the sense that primary insurers cede a single risk to many other reinsurers, which in turn often cede it to different retrocessionnaires. In contrast to retail bank deposits and wholesale market bank funding, (re)insurance reserves are not instantaneously puttable and thus cannot be redeemed on demand by policyholders. Also unlike banks, which tend to borrow short term and lend long term, (re)insurers' asset and liability maturities tend to be well matched. Therefore, regulators should resist the temptation to put (re)insurers in the same category as banks and other financial institutions. Neither insurers nor reinsurers create significant systemic risk. Therefore, Kessler argues, designating (re)insurers as systemically important financial institutions (SIFIs) would reduce insurers' and reinsurers' profitability at the expense of solvency. The second article in the symposium is a macro-overview analysis of systemic risk in the insurance industry by J. David Cummins and Mary A. Weiss. Their article examines the potential for the U.S. insurance industry to cause systemic risk events that spill over to banking or other segments of the economy. They examine primary indicators of systemic risk as well as contributing factors that exacerbate vulnerability to systemic events. The evaluation of systemic risk is based on a detailed financial analysis of the insurance industry, its role in the economy, and the interconnectedness of insurers. Insurers are shown to have very low default risk and low susceptibility to financial crises. However, life insurers have higher leverage and more exposure to asset-backed securities and illiquid privately placed bonds than property-casualty (P-C) insurers. …

Reinsurance and Systemic Risk: The Impact of Reinsurer Downgrading on Property–Casualty Insurers

AbstractThis article analyzes the interconnectedness between reinsurers and U.S. property–casualty (P/C) insurers and presents the first detailed examination on the likely impact of major global reinsurer insolvency on the U.S. P/C insurance industry, in order to illustrate the potential systemic risk caused by the interconnectedness of the insurance sector through reinsurance. We find that the likelihood of a primary insurer's downgrade increases with its reinsurance default risk exposure from downgraded reinsurers. Counterparty primary insurers' stocks also react negatively to their reinsurers' downgrades. The negative effects also spill over to insurers that are not directly exposed to the credit risk of downgraded reinsurers. Despite the close interconnectedness, worst‐case scenario analyses show that the likelihood of systemic risk caused by reinsurance transactions is relatively small for the U.S. P/C insurance industry.

Lack of access to chemotherapy for colon cancer: multiplicative disadvantage of being extremely poor, inadequately insured and African American

BackgroundDespite evidence of chemotherapy’s ability to cure or comfort those with colon cancer, nearly half of such Americans do not receive it. African Americans (AA) seem particularly disadvantaged. An ethnicity by poverty by health insurance interaction was hypothesized such that the multiplicative disadvantage of being extremely poor and inadequately insured is worse for AAs than for non-Hispanic white Americans (NHWA).MethodsCalifornia registry data were analyzed for 459 AAs and 3,001 NHWAs diagnosed with stage II to IV colon cancer between 1996 and 2000 and followed until 2011. Socioeconomic data from the 2000 census categorized neighborhoods: extremely poor (≥ 30% of households poor), middle (5-29% poor) and low poverty (< 5% poor). Participants were randomly selected from these poverty strata. Primary health insurers were Medicaid, Medicare, private or none. Chemotherapy rates were age and stage-adjusted and comparisons used standardized rate ratios (RR). Logistic and Cox regressions, respectively, modeled chemotherapy receipt and long term survival.ResultsA significant 3-way ethnicity by poverty by health insurance interaction effect on chemotherapy receipt was observed. Among those who did not live in extremely poor neighborhoods and were adequately insured privately or by Medicare, chemotherapy rates did not differ significantly between AAs (37.7%) and NHWAs (39.5%). Among those who lived in extremely poor neighborhoods and were inadequately insured by Medicaid or uninsured, AAs (14.6%) were nearly 60% less likely to receive chemotherapy than were NHWAs (25.5%, RR = 0.41). When the 3-way interaction effect as well as the main effects of poverty, health insurance and chemotherapy was accounted for, survival rates of AAs and NHWAs were the same.ConclusionsThe multiplicative barrier to colon cancer care that results from being extremely poor and inadequately insured is worse for AAs than it is for NHWAs. AAs are more prevalently poor, inadequately insured, and have fewer assets so they are probably less able to absorb the indirect and direct, but uncovered, costs of colon cancer care. Policy makers ought to be cognizant of these factors as they implement the Affordable Care Act and consider future health care reforms.

Health insurance mediation of the Mexican American non-Hispanic white disparity on early breast cancer diagnosis.

We examined health insurance mediation of the Mexican American (MA) non-Hispanic white (NHW) disparity on early breast cancer diagnosis. Based on social capital and barrio advantage theories, we hypothesized a 3-way ethnicity by poverty by health insurance interaction, that is, that 2-way poverty by health insurance interaction effects would differ between ethnic groups. We secondarily analyzed registry data for 303 MA and 3,611 NHW women diagnosed with breast cancer between 1996 and 2000 who were originally followed until 2011. Predictors of early, node negative (NN) disease at diagnosis were analyzed. Socioeconomic data were obtained from the 2000 census to categorize neighborhood poverty: high (30% or more of the census tract households were poor), middle (5% to 29% poor) and low (less than 5% poor). Barrios were neighborhoods where 50% or more of the residents were MA. Primary health insurers were Medicaid, Medicare, private or none. MA women were 13% less likely to be diagnosed early with NN disease (RR = 0.87), but this MA-NHW disparity was completely mediated by the main and interacting effects of health insurance. Advantages of health insurance were largest in low poverty neighborhoods among NHW women (RR = 1.20) while among MA women they were, paradoxically, largest in high poverty, MA barrios (RR = 1.45). Advantages of being privately insured were observed for all. Medicare seemed additionally instrumental for NHW women and Medicaid for MA women. These findings are consistent with the theory that more facilitative social and economic capital is available to MA women in barrios and to NHW women in more affluent neighborhoods. It is there that each respective group of women is probably best able to absorb the indirect and direct, but uncovered, costs of breast cancer screening and diagnosis.

The Market for Reinsurance

Using a unique proprietary data set of primary insurers and reinsurers, we analyze the structure of the reinsurance market. The data set, which spans six years, contains quotes for different reinsurance layers, for different treaties, for different clients, and for different lines of business. There are in fact close to 20,000 quotes for close to 1,000 reinsurance treaties, 70% of which have more than one layer. This is the first study that documents the actual structure of the global reinsurance market using actual quotes, and not only the wining quote, for a large number of layers of a large number of reinsurance treaties. We find that reinsurance treaties have generally become more complex over the years. We also find an interesting linear pattern is the distribution of the quotes by line of insurance.

Mediation of the effects of living in extremely poor neighborhoods by health insurance: breast cancer care and survival in California, 1996 to 2011.

BackgroundWe examined the mediating effect of health insurance on poverty-breast cancer care and survival relationships and the moderating effect of poverty on health insurance-breast cancer care and survival relationships in California.MethodsRegistry data for 6,300 women with breast cancer diagnosed between 1996 and 2000 and followed until 2011 on stage at diagnosis, surgeries, adjuvant treatments and survival were analyzed. Socioeconomic data were obtained for residences from the 2000 census to categorize neighborhoods: high poverty (30% or more poor), middle poverty (5%-29% poor) and low poverty (less than 5% poor). Primary payers or health insurers were Medicaid, Medicare, private or uninsured.ResultsEvidence of survival mediation was observed for women with node negative breast cancer. The apparent effect of poverty disappeared in the presence of Medicare or private health insurance. Women who were so insured were advantaged on 8-year survival compared to the uninsured or those insured by Medicaid (OR = 1.89). Evidence of payer moderation by poverty was also observed for women with node negative breast cancer. The survival advantaging effect of Medicare or private insurance was stronger in low poverty (OR = 1.81) than it was in middle poverty (OR = 1.57) or in high poverty neighborhoods (OR = 1.16). This same pattern of mediated and moderated effects was also observed for early stage at diagnosis, shorter waits for adjuvant radiation therapy and for the receipt of sentinel lymph node biopsies. These findings are consistent with the theory that more facilitative social and economic capital is available in low poverty neighborhoods, where women with breast cancer may be better able to absorb the indirect and direct, but uncovered, costs of care. As for treatments, main protective effects as well as moderator effects indicative of protection, particularly in high poverty neighborhoods were observed for women with private health insurance.ConclusionsAmerica’s multi-tiered health insurance system mediates the quality of breast cancer care. The system is inequitable and unjust as it advantages the well insured and the well to do. Recent health care reforms ought to be enacted in ways that are consistent with their federal legislative intent, that high quality health care be truly available to all.

Effects of being uninsured or underinsured and living in extremely poor neighborhoods on colon cancer care and survival in California: historical cohort analysis, 1996—2011

BackgroundWe examined the mediating effects of health insurance on poverty-colon cancer care and survival relationships and the moderating effects of poverty on health insurance-colon cancer care and survival relationships among women and men in California.MethodsWe analyzed registry data for 3,291 women and 3,009 men diagnosed with colon cancer between 1996 and 2000 and followed until 2011 on lymph node investigation, stage at diagnosis, surgery, chemotherapy, wait times and survival. We obtained socioeconomic data for individual residences from the 2000 census to categorize the following neighborhoods: high poverty (30% or more poor), middle poverty (5-29% poor) and low poverty (less than 5% poor). Primary health insurers were Medicaid, Medicare, private or none.ResultsEvidence of mediation was observed for women, but not for men. For women, the apparent effect of poverty disappeared in the presence of payer, and the effects of all forms of health insurance seemed strengthened. All were advantaged on 6-year survival compared to the uninsured: Medicaid (RR = 1.83), Medicare (RR = 1.92) and private (RR = 1.83). Evidence of moderation was also only observed for women. The effects of all forms of health insurance were stronger for women in low poverty neighborhoods: Medicaid (RR = 2.90), Medicare (RR = 2.91) and private (RR = 2.60). For men, only main effects of poverty and payers were observed, the advantaging effect of private insurance being largest. Across colon cancer care processes, Medicare seemed most instrumental for women, private payers for men.ConclusionsHealth insurance substantially mediates the quality of colon cancer care and poverty seems to make the effects of being uninsured or underinsured even worse, especially among women in the United States. These findings are consistent with the theory that more facilitative social and economic capital is available in more affluent neighborhoods, where women with colon cancer may be better able to absorb the indirect and direct, but uncovered, costs of care.

The ideal of biopsychosocial chronic care: How to make it real? A qualitative study among Dutch stakeholders

BackgroundChronically ill patients often experience psychosocial problems in everyday life. A biopsychosocial approach is considered to be essential in chronic care. In Dutch primary health care the current biomedically oriented clinical practice may conflict with the biopsychosocial approach. This study is aimed to explore the views of Dutch stakeholders on achieving a biopsychosocial approach to the care of patients with chronic diseases.MethodsIn a qualitative explorative study design, we held semi-structured interviews with stakeholders, face-to-face or by telephone. Data were analysed using content analysis. Thirty representatives of Dutch patients with chronic illnesses, primary care professionals, policy makers, health inspectorate, health insurers, educational institutes and researchers were interviewed.ResultsStakeholders were aware that a systematic biopsychosocial care approach is lacking in current practice. Opportunities for effective change are multidimensional. Achieving a biopsychosocial approach to care relates to active patient participation, the training of professionals, high-quality guidelines, protocols and tools, integrated primary care, research and financial issues.ConclusionsAlthough the principles and importance of the biopsychosocial model have been recognized, the provision of care that starts from the medical, emotional or social needs of individual patients does not fit in easily with the current Dutch health care system. All parties involved need to make a commitment to realize the ideal of biopsychosocial chronic care. Together they need to equip health professionals with skills to understand patients' multifaceted needs and to reward integrated biopsychosocial care. Patients need to be empowered to be active partners in their own care.

Model Uncertainty and Insurance of Structured Bonds

In this paper, we present a stylised credit risk model for structured bonds. Through this, we explain how the presence of primary bond insurers such as Ambac and MBIA, who were highly active in bond markets prior to the recent financial crisis, contributed towards transforming the emergence of model uncertainty within a segment of opaque structured products with little data on historical performance or borrower characteristics into a marketwide problem. It is no surprise that these products, with little information to facilitate accurate credit risk modelling, were susceptible to model uncertainty. The contagion of this model uncertainty, however, arises specifically due to (i) the presence of rating-constrained investors who cannot hold the asset unless its credit rating is sufficiently high, and (ii) the insurer's lack of willingness to defend his rating by raising additional capital against his exposure to potentially toxic bonds. We find that the credit rating agency's attitude towards model uncertainty -- as represented by the α-maxmin preference (Ghirardato, Maccheroni and Marinacci, 2004) -- is of primary importance, as its strict capital requirement in the face of model uncertainty could trigger an insurer downgrade. This results in a systemic price discount of all insured bonds, and its adverse effect on the overall investor welfare is most acute when the proportion of rating-constrained investors is high. We also outline how the capital requirement may be optimally redesigned to meet the conflicting needs of different groups of market participants.

Adverse Selection in Reinsurance Markets

This paper looks for evidence of adverse selection in the relationship between primary insurers and reinsurers. We test the implications of a model in which informational asymmetry – and therefore, its negative consequences – decline over time. Our tests involve a data panel consisting of U.S. property-liability insurance firms that reported to the National Association of Insurance Commissioners (NAIC) during the period 1993-2012. We find that the amount of reinsurance, insurer profitability, and insurer credit quality all increase with the tenure of the insurer-reinsurer relationship.

Investigating Risk Disclosure Practices in the European Insurance Industry

In light of the upcoming Solvency II Pillar 3 disclosure regulation for the insurance industry, this paper explores the risk disclosure practices in annual reports of European primary insurers in the Dow Jones Stoxx 600 Insurance Index between 2005 and 2009. On the basis of a self-constructed risk disclosure index, the study examines the relation between the extent of risk disclosure and insurance companies’ characteristics such as size, risk, profitability, ownership dispersion, cross-listing, home country and type of insurance sold, to draw inferences regarding motives for enhanced risk disclosure based on positive accounting theory.

Discontinued German life insurance portfolios: rules‐in‐use, interest rate risk, and Solvency II

PurposeThis paper seeks to provide an overview on potential impacts German primary life insurers are exposed to in relation to upcoming Solvency II regulation and potential strategic choices, especially in the light of halting low‐interest rates. Given a large degree of complexity, the paper aims at giving some guidance to decision makers considering a discontinuation of underwriting.Design/methodology/approachThe paper builds upon current observations made in the German primary life insurance industry, especially, recent strategic decisions of two market participants to discontinue their life insurance carriers. On the background of low‐interest rates but yet guaranteed interest participations and additional capital requirements arising from Solvency II, the paper illustrates the strategic options life insurers have in the German market, given the specific market environment.FindingsRegulatory capital requirements of Solvency II will sanction guarantee products in a way that for some insurers life products will become unattractive. As there is evidence in the market that some participants have started to consider the run‐off option for selected carriers, the paper finds that this option may represent an appropriate consequence not only for foreign insurers ceasing their business in Germany but also for domestic insurance groups. Given the specific rules‐in‐use in the German primary life insurance market, the paper discusses the controlled run‐off approach as a strategic option for selected life insurers, enabling a harvesting strategy through maximizing cash flows from existing liabilities while avoiding further investments.Originality/valueDiscussions in this paper help to bring into focus the strong challenges by both the upcoming regulatory Solvency II and current market conditions. The brief case study included in this paper may illustrate the implications as well as some crucial success factors of discontinued life business.

Investigating Risk Disclosure Practices in the European Insurance Industry

In light of the upcoming Solvency II Pillar 3 disclosure regulation for the insurance industry, this paper explores the risk disclosure practices in annual reports of European primary insurers in the Dow Jones Stoxx 600 Insurance Index between 2005 - 2009. Based on a self-constructed risk disclosure index, the study examines the relation between the extent of risk disclosure and insurance companies' characteristics such as size, risk, profitability, ownership dispersion, cross-listing, home country, and type of insurance sold, to draw inferences regarding motives for enhanced risk disclosure based on positive accounting theory. Horing, D. and H. Grundl (2011), Investigating risk disclosure practices in the European insurance industry, The Geneva Papers advance online publication 1 June, doi:10.1057/gpp.2011.13