The impact of market competitors on the demand for reinsurance

Abstract

Purpose

According to the market competition theory, a firm’s decision-making is influenced by the behaviors or strategies of its competitors. The repercussions of competition include market-stealing and spillover effects. Relatively few studies in the reinsurance literature discuss the effect of competitors on an insurer’s decision-making. This study aims to fill a gap in the reinsurance literature by comparing insurers' reinsurance demand to their competitors' reinsurance purchases.

Design/methodology/approach

This study uses unbalanced panel data for the US property-liability insurance industry from 2006 to 2017 to determine the impact of competitors' reinsurance purchases on insurers' reinsurance demand. This study employs the Mixed Effect Model and the Quantile Regression to test the proposed hypotheses.

Findings

The evidence suggests that the affiliated reinsurance purchases of competitors have a positive and substantial effect on the affiliated reinsurance demand of insurers, crediting mimicking the reinsurance strategy. Interestingly, the market-stealing effect is supported while the non-affiliated reinsurance metric is used. Remarkably, given insurers with low non-affiliated reinsurance purchases, the finding sustains the mimicking reinsurance strategy. Nevertheless, the market-stealing effect remains a concern for insurers with a high non-affiliated reinsurance purchase.

Originality/value

The new findings concerning competitor effects analysis fill a void in the reinsurance literature. Risk diversification, capital substitution, and real services demand may play a crucial role in determining the market-stealing effect, leading to a decrease in market share. Insurers can mitigate the market-stealing effect of competitors by accessing expertise and capital substitution through non-affiliated reinsurance purchases.

Citation

Chang, V.Y.L. (2024), "The impact of market competitors on the demand for reinsurance", Managerial Finance, Vol. 50 No. 10, pp. 1773-1789. https://doi.org/10.1108/MF-01-2023-0005