Risk-sharing function in internal capital markets: Evidence from intragroup reinsurance activities |
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| Institution: | 1. Department of Risk Management and Insurance, Tamkang University, Taiwan, 151, Yingzhuan Rd., Tamsui Dist., New Taipei City 25137, Taiwan;2. Department of Risk Management and Insurance, Research Fellow, Risk and Insurance Research Center, College of Commerce, National Chengchi University, Taiwan, 64, Sec. 2, Zhi-Nan Road, Wen-Shan District, Taipei 11605, Taiwan;1. School of Finance and Accounting, Fuzhou University of International Studies and Trade, Fuzhou, China;2. International Business School, Beijing Foreign Studies University, Beijing, China;1. School of Intelligent Finance and Business, Xi''an Jiaotong-Liverpool University, Suzhou, China;2. School of Accounting and Finance, The Hong Kong Polytechnic University, Kowloon, Hong Kong, China;4. Faculty of International Tourism and Management, City University of Macau, Avenida Padre Tomás Pereira Taipa, Macau;1. School of Business, Central South University, Changsha 410083, China;2. School of Finance, Shanghai Lixin University of Accounting and Finance, Shanghai 201209, China;3. Innovation Research Institute of Traditional Chinese Medicine, Shanghai University of Traditional Chinese Medicine, Shanghai 201203, China |
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| Abstract: | This study explicitly investigates the risk-sharing function of internal capital markets by analyzing intragroup reinsurance (a substitute for capital) activities in the United States' non-life insurance sector. We find supporting evidence that intragroup reinsurance participants are generally associated with smoother income flows, and such an income smoothing effect exists for both ceding and assuming firms. Further to prior studies, we find that internal reinsurance ceded exerts both direct and indirect effects on premiums growth in the aftermath of the financial crisis in 2007 and 2008. In addition to direct capacity support, the reduction in income volatility is another channel through which intragroup reinsurance enhances ceding firms' premiums growth. In the presence of market turmoil, the risk-sharing function can lower member firms' insolvency risk and thus enable them to pursue business growth. |
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