Risk management and the cost of equity: evidence from the United Kingdom’s non-life insurance market

We investigate the effect of risk management (reinsurance) on the corporate cost of equity using panel data drawn from the United Kingdom’s (UK) non-life insurance industry. Our results show that use of reinsurance lowers the cost of equity but that the relation is non-linear. We find that the rate of reduction declines as the level of premiums ceded relative to total gross premiums written increases. We also find that the reinsurance-cost of equity relation is moderated by the risk of financial distress/bankruptcy. This moderating relation is robust to the use of three alternative measures of financial distress and bankruptcy risk.

• Publication year

  2021

• Venue

  European Journal of Finance

• Publication date

  2021-06-08

• Fields of study

  Business, Economics

• Identifiers
  DOI 10.1080/1351847X.2021.1936588
• External record

  Open on Semantic Scholar

• Source metadata

  Semantic Scholar

• No claims are published for this paper.

• No concepts are published for this paper.

• Leverage and reinsurance effects on loss reserves in the United Kingdom’s property–casualty insurance industry

  2018cited by this paper
• Natural Disasters

  2018cited by this paper
• Types of investor uncertainty and the cost of equity capital

  2017cited by this paper
• Risk-Shifting, Equity Risk, and the Distress Puzzle

  2017cited by this paper
• The Cost of Equity for Private Firms

  2016cited by this paper
• Financial Ratios , Discriminant Analysis and the Prediction of Corporate Bankruptcy

  2016cited by this paper
• The strategic role of reinsurance in the United Kingdom’s (UK) non-life insurance market

  2015cited by this paper
• The Cost of Equity for Private Firms

  2015cited by this paper
• Common Errors: How to (and Not to) Control for Unobserved Heterogeneity

  2014cited by this paper
• Corporate Risk Management Under Information Asymmetry

  2014cited by this paper
• Cash Flow Hedging and Liquidity Choices

  2014cited by this paper
• Corporate hedging and the cost of debt

  2014influential reference
• PREDICTING FINANCIAL DISTRESS OF COMPANIES: REVISITING THE Z-SCORE AND ZETA ® MODELS

  2013cited by this paper
• Does Property Rights Protection Affect Corporate Risk Management Strategy? Intra- and Cross-Country Evidence

  2012cited by this paper
• Why Are U.S. Stocks More Volatile

  2012cited by this paper
• Mergers & Acquisitions, Diversification and Performance in the U.S. Property-Liability Insurance Industry

  2011cited by this paper
• The Effects of Derivatives on Firm Risk and Value

  2011cited by this paper
• The Relation between Expected Returns, Realized Returns, and Firm Risk Characteristics

  2011cited by this paper
• Reinsurance and Capital Structure: Evidence from the United Kingdom Non-Life Insurance Industry

  2011cited by this paper
• Corporate derivatives use and the cost of equity

  2011cited by this paper
• The Real and Financial Implications of Corporate Hedging

  2011cited by this paper
• Financing risk transfer under governance problems: Mutual versus stock insurers

  2010influential reference
• Is Default Risk Negatively Related to Stock Returns

  2010cited by this paper
• Testing for Trade-offs in the Reinsurance Decision of U.K. Life Insurance Firms

  2010cited by this paper
• 计量经济分析 = Econometric analysis

  2009cited by this paper
• Lessons from the Financial Crisis on Risk and Capital Management: The Case of Insurance Companies

  2009cited by this paper
• Return Reversals, Idiosyncratic Risk, and Expected Returns

  2009cited by this paper
• Accruals Quality, Information Risk and Cost of Capital: Evidence from Australia

  2009cited by this paper
• Industry Cost of Equity Capital: UK Evidence

  2009cited by this paper
• In Search of Distress Risk

  2008cited by this paper
• Why firms purchase property insurance

  2008cited by this paper
• Debt Capacity, Cost of Debt and Corporate Insurance

  2008cited by this paper
• Estimating the Cost of Equity for Property-Liability Insurance Companies

  2008cited by this paper
• Implications of IFRS for the European Insurance Industry—Insights from Capital Market Theory

  2007cited by this paper
• A Reexamination of the Corporate Demand for Reinsurance

  2006cited by this paper
• Does Reinsurance Need Reinsurers

  2006cited by this paper
• Does inflation exaggerate the equity premium

  2006cited by this paper
• Estimating the Cost of Equity Capital for Property-Liability Insurers

  2005influential reference
• Assessing Alternative Proxies for the Expected Risk Premium

  2005cited by this paper
• Information and the Cost of Capital

  2004cited by this paper
• Bankruptcy Prediction With Industry Effects

  2004influential reference
• Default Risk in Equity Returns

  2004cited by this paper
• NBER WORKING PAPER SERIES RISK MANAGEMENT, CAPITAL BUDGETING AND CAPITAL STRUCTURE POLICY FOR INSURERS AND REINSURERS

  2003cited by this paper
• Debt Dynamics

  2003cited by this paper
• Econometric Analysis of Cross Section and Panel Data

  2002cited by this paper
• INTEGRATING RISK MANAGEMENT AND CAPITAL MANAGEMENT

  2002cited by this paper
• Rate Regulation, Competition, and Loss Reserve Discounting by Property-Casualty Insurers

  2000cited by this paper
• Integrated Risk Management: Techniques and Strategies for Reducing Risk

  2000cited by this paper
• The Design of Private Reinsurance Contracts

  2000cited by this paper
• Estimating the Equity Risk Premium Using Accounting Fundamentals

  2000cited by this paper
• Beyond Mean–Variance: Performance Measurement in a Nonsymmetrical World (corrected)

  1999cited by this paper
• NBER WORKING PAPER SERIES THE MARKET FOR CATASTROPHE RISK: A CLINICAL EXAMINATION

  1999cited by this paper
• The Financing of Catastrophe Risk

  1999cited by this paper
• Forecasting Bankruptcy More Accurately: A Simple Hazard Model

  1999cited by this paper
• Consistent Covariance Matrix Estimation with Spatially Dependent Panel Data

  1998influential reference
• Probabilistic Insurance

  1998cited by this paper
• Agency Costs of Corporate Risk Management

  1998cited by this paper
• Is the Risk of Bankruptcy a Systematic Risk

  1998cited by this paper
• Hedging and Coordinated Risk Management: Evidence from Thrift Conversions

  1998cited by this paper
• Agency Costs, Risk Management, and Capital Structure

  1998cited by this paper
• Full-Information Industry Betas

  1998influential reference
• Disclosure level and the cost of equity capital

  1997cited by this paper
• On the Pricing of Intermediated Risks: Theory and Application to Catastrophe Reinsurance

  1997cited by this paper
• Industry costs of equity

  1997cited by this paper
• Rethinking Risk Management

  1996cited by this paper
• Understanding Risk and Return

  1996influential reference
• The Demand for Reinsurance: Theory and Empirical Tests

  1995cited by this paper
• Size and Book-to-Market Factors in Earnings and Returns

  1995cited by this paper
• Corporate Incentives for Hedging and Hedge Accounting

  1995cited by this paper
• Explaining variation in risk across insurance companies

  1994cited by this paper
• On the Determinants of Corporate Hedging

  1993cited by this paper
• THE UNDERINVESTMENT PROBLEM, BOND COVENANTS AND INSURANCE

  1993cited by this paper
• Risk Management: Coordinating Corporate Investment and Financing Policies

  1992cited by this paper
• Loss volatility, bankruptcy, and the demand for reinsurance

  1990cited by this paper
• On the Corporate Demand for Insurance: Evidence from the Reinsurance Market

  1990cited by this paper
• The Determinants of Firms' Hedging Policies

  1985cited by this paper
• On the Corporate Demand for Insurance

  1982cited by this paper
• Reinsurance under Conditions of Capital Market Equilibrium: A Note

  1981cited by this paper
• The Valuation of Uncertain Income Streams and the Pricing of Options

  1976cited by this paper
• CORPORATE INCOME TAXES AND THE COST OF CAPITAL: A CORRECTION

  1963cited by this paper

• Reinsurance and technical liabilities as determinants of firm value and profitability: Evidence from Jordanian insurers with the mediating role of excess loss installments

  2025cites this paper
• Development Policy for the Non-Life Insurance Market in Vietnam in the Context of Industry 4.0

  2025cites this paper
• Developing the Non-life Insurance Market in the Context of the Fourth Industrial Revolution: International Experiences and Lessons for Vietnam

  2025cites this paper
• Hybrid Blockchain Technology Adoption to Enhance Transaction Transparency in the Insurance Industry

  2025cites this paper
• Mapping the landscape: a bibliometric analysis of ISO 31000

  2024cites this paper
• Reinsurance and Sustainability: Evidence from International Insurers

  2023cites this paper
• Culture and integration of Eurozone life insurance markets

  2023cites this paper
• Risk Based Capital Factors’ Impact for Reinsurance’s Business and Profitability

  2023cites this paper
• How does actual relative to target leverage affect reinsurance use?

  2023cites this paper
• Share repurchase and the cost of capital: Discussion on the nature of share repurchase of Chinese listed companies

  2023cites this paper
• Continuity risks

  2022cites this paper
• CONTRIBUTION OF REINSURANCE BUSINESS TO THE ECONOMY

  2022cites this paper
• Factors Influencing Credit Risk and Insurance Risk in General Insurance of Indonesia : Technical Reserve Ratio and Reinsurance Ratio (Financial Management Literature Review)

  2022cites this paper
• The relationship between financial decisions and equity risk

  2022influential citation
• Risk Constraints in the Context of Big Data and Optimization of a Virtuous Interaction Mechanism for Insurance Management Based on Distorted Risk Metrics

  2022cites this paper
• Analysis of the Return and Risk of Investment in Insurance Companies Listed on the Indonesia Stock Exchange

  2021cites this paper
• The Demand of Cost of Equity: Is Audit Attributes Matters?

  2021cites this paper