Risk-sharing function in internal capital markets: Evidence from intragroup reinsurance activities

This study explicitly investigates the risk-sharing function of internal capital markets by analyzing intragroup reinsurance (a substitute for capital) activities in the United States' non-life insurance sector. We find supporting evidence that intragroup reinsurance participants are generally associated with smoother income flows, and such an income smoothing effect exists for both ceding and assuming firms. Further to prior studies, we find that internal reinsurance ceded exerts both direct and indirect effects on premiums growth in the aftermath of the financial crisis in 2007 and 2008. In addition to direct capacity support, the reduction in income volatility is another channel through which intragroup reinsurance enhances ceding firms' premiums growth. In the presence of market turmoil, the risk-sharing function can lower member firms' insolvency risk and thus enable them to pursue business growth.

Automated summary

This study investigates the risk-sharing function of internal capital markets in the non-life insurance sector in the United States, specifically through analyzing intragroup reinsurance activities. The findings show that intragroup reinsurance participants are associated with smoother income flows, benefiting both ceding and assuming firms. Furthermore, the study finds that internal reinsurance ceded has direct and indirect effects on premiums growth, particularly after the 2007-2008 financial crisis. The risk-sharing function of intragroup reinsurance not only provides capacity support but also reduces income volatility, enabling firms to pursue business growth.