Factors Influencing Demand for Reinsurance

Specificity of insurance companies’ business model with inversion of business process in which they base insurance pricing on assumed losses and not on the real ones, exposes this financial institutions to underwriting or actuarial risk. The most important method of underwriting risk management is reinsurance which provides insurance companies with stabilization of loss experience, increase of underwriting capacity, protection of catastrophic losses and technical assistance in the underwriting activities. This paper investigates the factors that influence insurance companies’ demand for reinsurance. Both insurers-specific and the reinsurance industry-specific factors are analysed. The empirical analysis is based on panel data consisting of all insurance companies in Croatian insurance market in the period from 2003 to 2011. The results show that demand for reinsurance is determined by product diversification, profitability, loss volatility as well as by price of reinsurance and the financial strength of reinsurance industry.