Internationalization in the Reinsurance Industry: An Analysis of the Net Financial Position of U.S. Reinsurers

ABSTRACT In today's global marketplace, the extent of internationalization has become increasingly relevant. We use the framework of the eclectic paradigm to empirically investigate internationalization by U.S. reinsurers using the net financial position in foreign markets to proxy for the level of internationalization. Our sample includes both developed and developing nations to provide a more complete analysis of internationalization of U.S. reinsurers. We find that the factors related to reinsurers' net financial positions vary based on the characteristics of the countries, the reinsurers, and the industry. INTRODUCTION In today's global marketplace, increased internationalization has become more relevant for a greater number of firms, with companies using foreign market penetration as a viable means of growth and/or diversification. Commonly cited factors for the increasing foreign market penetration include a rise in the number of countries participating in free-trade agreements, the continued growth in the domestic markets of developed and developing countries, benefits of diversification, and an overall increase in the demand for various goods and services. Developing countries are of key interest in the internationalization strategies of firms due, in part, to the potential opportunities of these untapped markets. These opportunities include the growth in wealth in these countries, the underdeveloped markets in many industries to serve this demand, and governmental incentives that are intended to help quickly foster the knowledge base to further develop these markets. The U.S. reinsurance marketplace is a particularly interesting market in which to study internationalization for two main reasons. One, there is detailed data available on the volume of reinsurance ceded and assumed from different countries allowing us to examine the net financial position or risk for these insurers. To the best of our knowledge, this type of net reinsurance analysis has not been done in the prior literature. Two, U.S. reinsurers play a significant role in the international reinsurance marketplace. For example, of the approximately 150 reinsurers studied from more than 40 countries by Standard & Poor's, the United States had the largest number of reinsurers surveyed. Also, although gross premiums written by U.S. reinsurers has declined some over the past few years, U.S. reinsurers still held nearly 20 percent of the world's reinsurance market in 2009 (Standard & Poor's, 2010). This shows the importance of U.S. reinsurers in the global marketplace. Existing research has explored a number of issues related to internationalization, such as international market cycles (e.g., Cummins and Outreville, 1987), loss shocks, capacity constraints in the reinsurance marketplace (e.g., Weiss and Chung, 2004; Cummins et al., 2008), trends in international supply and demand for insurance (e.g., Beenstock, Dickinson, and Khajuria, 1988; Outreville, 1990; Browne and Kim, 1993; Outreville, 1995, 1996; Ma and Pope, 2003), and the impact of free trade (e.g., Campbell, Goldberg, and Rai, 2003). There have also been a few studies that have focused specifically on the motives for the internationalization of insurance (e.g., Ma and Pope, 2003; Cole, Lee, and McCullough, 2007). Our article extends the prior works in several ways. First, this study analyzes the net financial position in a given country as a measure of international exposure rather than the reinsurance assumed as used in Cole, Lee, and McCullough (2007) and other studies. Most prior research has not incorporated the fact that reinsurance can be both ceded and assumed from a given country. This is important because a company's net financial position in a country may be very different than total reinsurance assumed. For example, U.S. reinsurers assume approximately $4.5 billion from insurers in the United Kingdom during our sample period. …