How does reinsurance and derivatives usage affect financial performance? Evidence from the UK non-life insurance industry

A three-equation structural model is applied in this study to facilitate our examination of 1994-2011 regulatory returns data on UK non-life insurers, from which we find that those insurers using more reinsurance tended to have inferior financial performance, whilst those insurers with a predisposition towards risk management tended to have used both reinsurance and derivatives. We also find that those insurers with high loss ratios were found to have inferior financial performance. Our analysis sheds some light on the relationships between financial performance, reinsurance and derivative usage.