Reinsurance and the management of regulatory ratios and taxes in the property—casualty insurance industry

Abstract

Reinsurance transactions provide an immediate enhancement to insurers' earnings and equity. The study investigates the use of reinsurance for regulatory and tax purposes. Traditional and financial reinsurance are examined separately, since the latter does not transfer significant insurance risk to reinsurers, and is viewed by regulators primarily as a means for enhancing statutory and financial reports. Both a univariate analysis and a multiple regression analysis support the hypothesis that insurers enter into financial reinsurance transactions to reduce regulatory costs. The results do not support the hypothesis that insurers adjust their reinsurance level as a function of their marginal tax rates.