The strategic role of reinsurance 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 rivals with lower reinsurance coverage in five main lines of insurance in the United Kingdom’s (UK) non-life insurance market. We use panel data drawn from statutory filings made by non-life insurers to the then UK regulator (FSA) over 1985 to 2010 period. We find that the influence of reinsurance and other financial variables on insurers’ growth in product-market share varies across lines of insurance business. Since reinsurance impacts on product-market outcomes in competitive non-life insurance industry, we conclude that reinsurance performs an important strategic function in insurance markets

An international forensic perspective of the determinants of bank CDS spreads

In this paper, we provide a forensic perspective of the determinants of banks' CDS spreads. Using data for 118 banks of 30 countries over the period 2004-2011, we find that banks' default risk typically reflects: (i) the quality of the banks’ balance sheet; (ii) liquidity of banks’ assets; (iii) how profitable banks’ operations are; (iv) the banks’ leverage ratios; and (v) how stringent/lenient regulatory capital ratios are. Considering a series of indicators of the financial structure of the banking system, our results reveal that: (i) higher concentration of the banking sector, stronger presence of foreign banks and a deterioration of the health of the banking sector lead to higher banks' CDS spreads; and (ii) the availability of alternative means of finance does not significantly influence banks' default risk. We also show that periods of high inflation, low GDP growth and stock market crashes are prone to an intensification of tensions in the banking system, but financial reforms (especially, in the field of banking supervision and privatizations) can mitigate them. Moreover, the timing, the duration and the composition of fiscal consolidation programs have a significant impact on banks' CDS spreads, and, in particular, expenditure-driven consolidation episodes are associated with a rise in banks' default risk. Finally, we highlight that although the financial crisis of 2008-2009 was a global event, higher quality of economic and legal institutions (and, therefore, in the regulatory framework) could have dampened the rise in bank' CDS spreads

Why Firms Purchase Property Insurance?

We investigate whether corporate finance incentives aect the extent of corporate hedging with property insurance. Using a database that contains detailed insurance information, we show that rms buy property insurance to reduce the expected costs of distress. Further, we document a scale effect: large rms purchase less insurance per unit of property. This is consistent with the notion that expected bankruptcy costs fall as firm size increases. We also show that the dividend payout ratio exerts a negative inuence on property insurance coverage. This result is consistent with the view that firms with high payout ratio insure a smaller fraction of property because of cash flows in excess of investment needs, easy access to capital markets or both.Corporate Risk Management, Property Insurance

Why firms purchase property insurance

We investigate whether corporate finance incentives affect the extent of corporate hedging with property insurance. Using a database that contains detailed insurance information, we document a positive relation between the expected costs of distress and property insurance coverage. We also show that the dividend payout ratio is negatively associated with property insurance coverage, consistent with the view that firms with high payout ratios insure a smaller fraction of properties due to cash flows in excess of investment needs, easy access to capital markets, or both. Different incentives are important for the insurance deductible and limit of coverage, and the deductible and limit of coverage are substitutes.Corporate risk management Property insurance

EUROPEAN CENTRAL BANK WORKING PAPER SERIES WORKING PAPER NO � 209 A FRAMEWORK FOR COLLATERAL RISK CONTROL DETERMINATION 1

This paper derives a general framework for collateral risk control determination in repurchase transactions or repos. The objective is to treat consistently heterogeneous collateral so that the collateral taker has a similar risk exposure whatever the collateral pledged. The framework measures the level of risk with the probability of incurring a loss higher than a pre-specified level given two well known parameters used to manage the intrinsic risk of collateral: marking to market and haircuts. It allows for the analysis in a self contained closed form of the way in which di#erent relevant factors interact in the risk control of collateral (e.g. marking to market frequency, level of volatility of interest rates, time to capture and liquidity risk, probability of default of counterparty, etc.). The framework, which combines the recent theoretical literature on credit and interest risk, provides an alternative quantifiable and objective approach to the existing more ad-hoc rule-based methods used in haircut determination