This paper investigates the impact of organisational structure and corporate governance on reinsurance decisions in the U.S. property-liability insurance industry. Our evidence shows that mutual insurers, mutual-owned stock insurers and stock insurers whose ultimate parent is publicly traded are likely to purchase more reinsurance from non-affiliated reinsurers than stock insurers closely held by managers. We also find that corporate governance significantly influences reinsurance purchases; specifically, CEO/chairperson duality is associated with lower reinsurance purchases while the percentage of independent directors on the board is positively (negatively) related to reinsurance purchases from non-affiliated (affiliated) reinsurers. Higher audit quality is associated with lower (higher) reinsurance purchases from non-affiliated (affiliated) reinsurers. Moreover, many interaction terms between organisational structure and corporate governance have significant effects on reinsurance decisions. Finally, we provide evidence that the Sarbanes–Oxley Act (SOX) has a substantial effect on the relation between organisational structure (corporate governance) and reinsurance decisions. The overall effect of SOX on reinsurance purchase from non-affiliated reinsurers is negative, implying that better investor protection results in higher risk taking and less risk shifting to outside reinsurers.
The Geneva Papers on Risk and Insurance-Issues and Practice