DETERMINANTS OF REINSURANCE COSTS FOR TURKISH NON-LIFE INSURANCE COMPANIES

Year 2022, , 68 - 77, 30.06.2022

Burak Alan , Emin Avcı

https://doi.org/10.17261/Pressacademia.2022.1557

Abstract

Purpose- Reinsurance is one of the most common practices in the insurance sector, however, it is not free of charge. The insurance companies
have to bear some costs to assure the reinsurers for sharing the risks of potential losses. The objective of this article is to explore the firmlevel factors that may affect the cost of reinsurance to an insurance company. In order to achieve the objective, the relationship between
reinsurance cost and financial and technical ratios, which are good monitoring tools for insurance companies, has been analyzed.
Methodology- The relationship between reinsurance cost and financial and technical ratios has been analyzed using panel data analyses.
The data was obtained from the official website of the Insurance Association of Türkiye (IAT). The data set include variables for 26 non-life
companies for the period of 2009 - 2021. Two separate models have been developed; one model with financial ratios and the second model
with technical ratios. The analyses are also repeated by uncovering the COVID-19 period and the 2018 currency crisis.
Findings- The findings of the study revealed that the financial ratios, namely return on assets and debt ratio; technical ratio as retention ratio
all have a negative significant effect on reinsurance cost. That is the higher the profit, debt level, and retention ratio, the more reluctant the
insurance companies are to bear insurance costs and carry most of the risks. Such variables have a negative effect on reinsurance costs with
a higher significance level, even after uncovering the recent COVID-19 pandemic and 2018 currency crisis periods. When COVID-19 and 2018
currency crisis periods are excluded from the data set, Net Combined Ratio becomes an additional significant factor affecting the reinsurance
costs.
Conclusion- As long as there is an insurance sector, there must be a reinsurance sector alongside. Companies from both sectors need to go
hand in hand in order to eliminate the possible future severe damages in case of fire, flood, or earthquake. However, reinsuring an insurance
contract would generate costs like every transaction in this economic system. The findings indicate that determinants of reinsurance cost
are as follow; return on asset, debt ratio, and retention ratio. This result would help management teams of insurance companies foresee the
cost of reinsurance when they monitor closely the ratios. In other words, the management team of an insurance company could control and
handle the condition of reinsurance contracts that generate cost.

Keywords

Reinsurance cost, insurance, firm performance, panel data analysis, ratio analysis

References

• Adams, M. (1996). The reinsurance decision in life insurance firms: An empirical test of the risk‐bearing hypothesis. Accounting and Finance, 36, 15-30.
• Adams, M., Hardwick, P., & Zou, H. (2008). Reinsurance and corporate taxation in the United Kingdom life insurance industry. Journal of Banking & Finance, 32(1), 101-115.
• Altuntas, M., Garven, J. and Rauch, J. (2018) On the corporate demand for insurance: evidence from the global reinsurance market. Risk Management and Insurance Review, 21(2), 221-242.
• Atukalp, M. E. (2021). Küresel Kovid-19 salgınının türkiye sağlık sigortası sektörüne etkisi. The Journal of International Scientific Researches, 6(3), 316-322.
• Aunon-Nerin, D., & Ehling, P. (2008). Why firms purchase property insurance. Journal of Financial Economics, 90(3), 298-312.
• Babuna, P., Yang, X., Gyilbag, A., Awudi, D. A., Ngmenbelle, D., & Bian, D. (2020). The impact of Covid-19 on the insurance industry. International Journal of Environmental Research and Public Health, 17(16), 5766.
• Berger, L. A., Cummins, J. D., & Tennyson, S. (1992). Reinsurance and the liability insurance crisis. Journal of Risk and Uncertainty, 5(3), 253- 272.
• Birleşme (n.d.). HDI Sigorta. Retrieved and archived on April 28, 2022, from http://web.archive.org/web/20220428083744/https://www.hdisigorta.com.tr/yasal-bilgilendirmeler/birlesme
• Birleşme Sözleşmesi (2020), Güneş Sigorta, Ziraat Sigorta, Halk Sigorta, June 24, 2020. birlesme-sozlesmesi.pdf (turkiyesigorta.com.tr)
• Breusch, T. S., & Pagan, A. R. (1980). The Lagrange multiplier test and its applications to model specification in econometrics. The Review of Economic Studies, 47(1), 239-253.
• Brown, M. B., & Forsythe, A. B. (1974). The small sample behavior of some statistics which test the equality of several means. Technometrics, 16(1), 129-132.
• Browne, M. J., & Hoyt, R. E. (1995). Economic and market predictors of insolvencies in the property-liability insurance industry. Journal of Risk and Insurance, 309-327.
• Carneiro, L. A., & Sherris, M. (2005). Demand for reinsurance: Evidence from Australian insurers. Faculty of Commerce and Economics, Sydney.
• Chen, R., & Wong, K. A. (2004). The determinants of financial health of Asian insurance companies. Journal of Risk and Insurance, 71(3), 469- 499.
• Chidambaran, N. K., Pugel, T. A., & Saunders, A. (1997). An investigation of the performance of the US property-liability insurance industry. Journal of Risk and Insurance, 371-382.
• Cole, C. R., & McCullough, K. A. (2006). A reexamination of the corporate demand for reinsurance. The Journal of Risk and Insurance, 73(1), 169-192.
• Cristea, M., Noja, G. G., Drăgoi, D., & Andriţoiu, L. C. (2021). Insurance development and life quality in the European Union countries. An empirical assessment. Economics and Organization, (1), 313-324.
• Cummins, J. D., Dionne, G., Gagné, R., & Nouira, A. (2021). The costs and benefits of reinsurance. The Geneva Papers on Risk and InsuranceIssues and Practice, 46(2), 177-199.
• D'Agostino, R. B., Belanger, A., & D'Agostino Jr, R. B. (1990). A suggestion for using powerful and informative tests of normality. The American Statistician, 44(4), 316-321.
• Doherty, N. A., & Garven, J. R. (1993). Interest Rates, Financial Structure and Insurance Cycles. University of Pennsylvania: Working Paper.
• Driscoll, J. C., & Kraay, A. C. (1998). Consistent covariance matrix estimation with spatially dependent panel data. Review of Economics and Statistics, 80(4), 549-560.
• Friedman, M. (1937). The use of ranks to avoid the assumption of normality implicit in the analysis of variance. Journal of the American Statistical Association, 32(200), 675-701.
• Garven, J. R., & Lamm-Tennant, J. (2003). The demand for reinsurance: Theory and empirical tests. Insurance and Risk Management, 7(3), 217-237.
• Haque, A., Mohona, N. T., Sultana, S., & Kulsum, U. (2021). The impact of Covid-19 on the insurance industry of Bangladesh. Indian Journal of Finance and Banking, 6(1), 73-85.
• Hausman, J. A. (1978). Specification tests in econometrics. Econometrica: Journal of the Econometric Society, 1251-1271.
• Hoerger, T. J., Sloan, F. A., & Hassan, M. (1990). Loss volatility, bankruptcy, and the demand for reinsurance. Journal of Risk and Uncertainty, 3(3), 221-245.
• Hoyt, R. E., & Khang, H. (2000). On the demand for corporate property insurance. Journal of Risk and Insurance, 91-107.
• Ikhwan, I., & Rusydiana, A. S. (2022). Stability of insurance efficiency during the Covid-19 pandemic: A comparative study between Islamic and conventional insurance in Indonesia. Jurnal Ekonomi dan Keuangan Islam, 8(1), 60-76.
• Kaur, S., & Singh, B. (2022). An overview of the impact of COVID-19 on the Indian health insurance sector and post-COVID-19 Management. International Management Review, 18, 63-93.
• Lee, H. H., & Lee, C. Y. (2012). An analysis of reinsurance and firm performance: Evidence from the Taiwan property-liability insurance industry. The Geneva Papers on Risk and Insurance-Issues and Practice, 37(3), 467-484.
• Lee, S. H., & Urrutia, J. L. (1996). Analysis and prediction of insolvency in the property-liability insurance industry: A comparison of logit and hazard models. Journal of Risk and insurance, 121-130.
• Levene, H. (1961). Robust tests for equality of variances. Contributions to probability and statistics. Essays in honor of Harold Hotelling, 279- 292.
• Lewis, C. M., & Murdock, K. C. (1996). The role of government contracts in discretionary reinsurance markets for natural disasters. Journal of Risk and Insurance, 567-597
• Mayers, D., & Smith Jr, C. W. (1990). On the corporate demand for insurance: evidence from the reinsurance market. Journal of Business, 19- 40.
• Morris, G. DL. (2018, March 6). A Brief History of Marine Insurance. Risk & Insurance. https://riskandinsurance.com/brief-history-marineinsurance/
• Powell, L. S., & Sommer, D. W. (2007). Internal versus external capital markets in the insurance industry: The role of reinsurance. Journal of Financial Service Research 31(2), 173–188.
• Puławska, K. (2021). Financial stability of European insurance companies during the COVID-19 pandemic. Journal of Risk and Financial Management, 14(6), 266.
• Shevchuk, O., Kondrat, I., & Stanienda, J. (2020). Pandemic as an accelerator of digital transformation in the insurance industry: Evidence from Ukraine. Insurance Markets and Companies, 11(1), 30.
• Stojkoski, V., Jolakoski, P., & Ivanovski, I. (2021). The short‐run impact of COVID‐19 on the activity in the insurance industry in the Republic of North Macedonia. Risk Management and Insurance Review, 24(3), 221-242.
• Tatoğlu, F. (2012). Panel Veri Ekonometrisi, 5th Edition, 2020.
• Vojinović, Ž., Milutinović, S., Sertić, D., & Leković, B. (2022). Determinants of sustainable profitability of the Serbian insurance industry: panel data investigation. Sustainability, 14(9), 5190.
• Wang, Y., Zhang, D., Wang, X., & Fu, Q. (2020). How does COVID-19 affect China’s insurance market? Emerging Markets Finance and Trade, 56(10), 2350-2362.
• Weiss, M. A., & Chung, J. H. (2004). US reinsurance prices, financial quality, and global capacity. Journal of Risk and Insurance, 71(3), 437- 467.
• Winter, R. A. (1991). The liability insurance market. Journal of Economic Perspectives, 5(3), 115-136.
• Worku, A., & Mersha, D. (2020). The Effect of COVID-19 on Insurance Industry in Ethiopia. Horn of African Journal of Business and Economics (HAJBE), 39-44.
• Yıldız, M. (2021). COVID-19 Pandemi Sürecinin Sigorta ve Bireysel Emeklilik Sistemine Etkisi. Nobel Yayınevi. Mayıs.
• Zou, H., Adams, M. B., & Buckle, M. J. (2003). Corporate risks and property insurance: Evidence from the People's Republic of China. Journal of Risk and Insurance, 70(2), 289-314