Marine reinsurance is an indemnity relationship in which the marine reinsurer indemnifies the insurance company for losses paid. When a primary insurance company becomes insolvent, there may be insufficient funds in the estate to pay claims in full and it may take several years to distribute such funds. / For this reason, some insureds and third-party claimants seek to collect reinsurance proceeds directly from reinsurers (direct actions). However, The indemnity nature of the reinsurance agreement prohibits direct actions against reinsurers for reinsurance proceeds by insureds and other claimants. Under a marine reinsurance contract, the reinsurer does not assume the liability of the reinsured insurance company. In other words, the original insured cannot enforce his insurer's contract of reinsurance and is not a third-party beneficiary to that contract. Therefore, no privity exists between the reinsurer and the insured or persons claiming through him under the contract of reinsurance. / Absent an intent to benefit directly or create rights in insureds or other third parties, reinsurance proceeds are payable only to the reinsured insurance company or its domiciliary liquidator where the insurer becomes insolvent. / The insolvency of the reinsured does not affect this fundamental premise. Yet, in the face of this well-established principle of law, the original insured and other claimants still seek to recover themselves by making direct claims on the insolvent's reinsurers. The persistence in pursuing the variety of theories upon which the claimants have proceeded suggests a continuing unwillingness to accept the balancing of interests stay in liquidation statutes and the need for reinsurers to clearly settle their rights and obligations in reinsurance contracts.

This dissertation presents pricing models for stop-loss reinsurance contracts for catastrophic events and for catastrophe insurance derivatives. We use doubly stochastic Poisson process or the Cox process for the claim arrival process for catastrophic events. The shot noise process is able to measure the frequency, magnitude and time period needed to determine the effect of the catastrophe. This process is used for the claim intensity function within the Cox process. The Cox process with shot noise intensity is examined by piecewise deterministic Markov process theory. We apply the Cox process incorporating the shot noise process as its intensity to price stop-loss catastrophe reinsurance contracts and catastrophe insurance derivatives. In order to calculate fair prices for reinsurance contracts and catastrophe insurance derivatives we need to assume that there is an absence of arbitrage opportunities in the market. This can be achieved by using an equivalent martingale probability measure in our pricing models. The Esscher transform is used to change probability measure. The dissertation also shows how to estimate the parameters of claim intensity using the likelihood function. In order to estimate the distribution of claim intensity, state estimation is employed as well. Since the claim intensity is not observable we filter it out on the basis of the number of claims, i.e. we employ the Kalman-Bucy filter. We also derive pricing formulae for stop-loss reinsurance contracts for catastrophic events using the distribution of claim intensity that is obtained by the Kalman-Bucy filter. Both estimations are essential in pricing stop-loss reinsurance contracts and catastrophe insurance derivatives.

Reinsurance is one of the most important tools to be used by insurance companies, for managing risks. This is an effective way / however, there are situations where reinsurance is insufficient, such as the occurrence of a natural hazard. When a natural hazard occurs, many insured experience loss at the same time, which drains the reinsurance market capacity. If future market capacity could be forecasted, then it would be easier for companies to decide when to include cat bonds or any other additional securities in their portfolio. In order to establish a model for market capacity, its relationship with other market parameters and the association among parameters are examined. In this study, these relationships are analyzed and used to establish an algorithm for predicting the next years reinsurance capacity. Moreover, last 10-year data for market capacity is used to establish and AR(1) model, in order to create a comparison with the algorithm. A case study of cat bonds is done, which uses the pricing load calculation of the Lane model and aims to ease the decision-making process by comparing the loads of cat bond and reinsurance pricing.

The main topic of my master thesis is the economy of facultative reinsurance from the point of view of a reinsurance company. First, the thesis briefly deals with the general structure of reinsurance and then is focused only on the facultative part. The thesis puts emphasis on the specific characteristics of facultative reinsurance and the creation of reinsurance slip and then uses this knowledge in a case study. The case study shows the risk from the insurance company and reinsurance company side and its aim is to create proper reinsurance structure for a power plant in Bulgaria. The thesis finishes with a chapter about the development of several reinsurance companies in the market.

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This thesis examines the joint impact of earnings management incentives (i.e., income smoothing, solvency management and tax management) and reinsurance, together with other institutional factors, on the magnitude and direction of claim (loss) reserves errors in the UK’s property-liability insurance industry. Two reserve error definitions, found in literature, are employed to conduct the analysis. Furthermore, a panel data generalised methods of moments (GMM) estimator is employed to incorporate the dynamic nature of current and past loss reserving errors. Using the GMM estimator in a panel of 151 firms over a period from 1991 and 2005, the study finds support for the conclusions of some prior studies but also inconsistencies with other previous research. The present study finds that the inferences drawn from empirical analyses can be influenced by the definition of loss reserving errors and to some extent how other incentive variables are defined. The results of this study suggest that discretionary loss reserving behaviour tends to persist from one year to another. Therefore, ignoring the dynamic nature of loss reserving errors could lead to biased and unreliable conclusions. The empirical results of this study also find that property-liability insurance managers manipulate claims reserves in order to smooth company’s earnings across accounting periods. Furthermore, empirical evidence is found which indicates that high levels of reinsurance ceded help to reduce the incidence of error in loss reserves. Contrary to expectations, the evidence presented in this thesis suggests that highly solvent insurers under-estimate their claims liabilities. However, no empirical support is found to indicate that insurers over-reserve in order to reduce and/or postpone period tax liabilities. The study also produced mixed results regarding the relation between the type of reinsurance cover used and claim reserve errors. Nevertheless, the empirical results show that firm-specific effects, such as company size and product mix, can have effect on the accuracy of insurers’ reserves. Finally, as this study gives an important insight on discretionary loss reserve manipulation, its conclusions could be of interest and relevance to the business decisions of investors, policyholders, regulators, and other interested parties (e.g., credit rating agencies and accounting standard settlers).

The link between the cost of equity and reinsurance purchased by insurers is examined in this study. This work extends the research on the economic value implications of corporate risk management practices. Utilising a framework based on the theory of optimal capital structure, this study puts forward two hypotheses to test empirically the cost of equity – reinsurance relation in the United Kingdom’s non-life insurance market. The first hypothesis tests the effect of the decision to reinsure on the insurers’ cost of equity, whereas the second hypothesis focuses on the link between the extent of reinsurance purchased and the cost of equity. Panel data samples drawn from 469 non-life insurance companies conducting business in the UK insurance market between 1985 and 2010 are used to test these hypotheses. The study employs a modified version of the Rubinstein-Leland (R-L) model to estimate the cost of equity. Both the hypotheses put forward are supported by the empirical evidence obtained through regression analysis. The empirical results suggest that, on average, users of reinsurance have a lower cost of equity than their counterparts who do not reinsure. The results also suggest that the relationship between the cost of equity and the level of reinsurance purchased is non-linear. It is inferred from this result that reinsurance can lower the cost of equity for primary insurers provided the cost of reinsuring is lower than the reduction in frictional costs achieved through reinsurance. This finding validates the use of the theory of optimal capital structure as the appropriate framework to guide this research. Robustness and sensitivity tests confirm that the influence of multicollinearity and endogeneity on the estimates is negligible. This study thus provides new and important insights on the impact of reinsurance (risk management) on firm value through its influence on the cost of equity. These findings are deemed useful to various stakeholders in insurance companies, including investors, managers, regulators, credit rating agencies and policyholder-customers.

published_or_final_version / Mathematics / Master / Master of Philosophy

This article reports a practical application of intelligence gathering and strategic planning online. Firms in the reinsurance industry (defined in the text) face changed market realities and new challenges. As they attempt to chart new strategies and apply innovative business models in response to the changing marketplace, information technology can make a significant contribution. Internet-based e-business strategies and related business models have proven utility, which has greatly benefited many organizations in the service sector. The question is not whether e-business-based strategic business models will work for firms in this industry, but how to make them work effectively. The field study reported here proposes and tests a practical and systematic framework, finding it to be highly effective and applicable.

This dissertation consists of two topics. Chapter 1 The Microstructure of the Reinsurance Network among US Property-Casualty Insurers and Its Effect on Insurers' Performance models the connectivity within the US property-casualty (P/C) reinsurance market as a network. It provides the first detailed empirical analysis of the microstructure of the reinsurance network including both affiliated and unaffiliated insurers. I find that reinsurance networks are highly sparse and yet largely connected, and exhibit hierarchical core-periphery structure. Moreover, an insurer's network position, measured by its network centrality, has economically significant implications for its loss experience and performance. Particularly, I find that there is an inverse U-shaped relationship between an insurer's network position and its combined ratio, and a U-shaped relationship between an insurer's network position and its performance measured by risk adjusted return on assets and risk adjusted return on equity. I also analyze the resilience of the reinsurance network against possible contagion risk by simulating economic impacts resulting from failures of one or more strategically networked reinsurers. The simulation results suggest that US Property-Casualty insurance industry is resilient to the failure of one or more top reinsurers. Chapter 2 Tail Risk Spillover and Its Contribution to Systemic Risk: A Network Analysis for Global Reinsurers analyzes the dynamic short-run tail risk dependence among global reinsurers and studies its contributions to global reinsurers' systemic risk, where a reinsurer's tail risk is measured by the Value-at-Risk. The tail risk dependence or tail risk spillover among global reinsurers is modeled as networks based on Granger Causality test. The results show that the tail risk interconnectedness among global reinsurers is subject to the impacts of both the insurance industry-wide shock and economy-wide shocks, where the former seems to have a larger effect than the latter. Moreover, I find that a reinsurer's role in the tail risk network as measured by degree/eigenvector centrality contributes significantly to its systemic risk, i.e., a more central tail risk network position will cause a higher level of systemic risk. I also find that there is a threshold effect of tail risk connectedness to systemic risk. That is, when the tail risk connectedness, as measured by daily network density, is below its median state, an increase in a reinsurer's tail risk network centrality will result in a decrease in its systemic risk possibly through risk diversification. In contrast, when the tail risk connectedness is above such threshold, an increase in the reinsurer's tail risk network centrality will lead to an increase in its systemic risk. / Business Administration/Risk Management and Insurance