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

Vineet Upreti Orcid Logo, Mike Adams, Joy Jia

The European Journal of Finance, Volume: 28, Issue: 6, Pages: 551 - 570

Swansea University Authors: Vineet Upreti Orcid Logo, Joy Jia

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Abstract

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...

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Published in: The European Journal of Finance
ISSN: 1351-847X 1466-4364
Published: Informa UK Limited 2021
Online Access: Check full text

URI: https://cronfa.swan.ac.uk/Record/cronfa56953
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Abstract: 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.
Keywords: Risk management; cost of equity; reinsurance; insurance; bankruptcy; UK
College: School of Management
Issue: 6
Start Page: 551
End Page: 570