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expected insolvency risk is higher. It is possible that insurers would suffer bankruptcy when
insurers suffer catastrophic risk without appropriate reinsurance, and all stakeholders would
be affected. Ho, Lai, and Lee (2013) suggest that the decision for insurance is a trade-off
between risk management and profitability gained from cost savings. Deshmukh, Goel, and
Howe (2013) find that the corporate selection of a top executive is often considered as
commitment to or a signal of change for existing corporate policies. Consequently, whether
an insurer’s reinsurance demand changes after CEO turnover is an interesting issue. Since
research on the reinsurance policy after CEO turnover has never been conducted, this study
aims to fill in the gap in the literature. To the best of our knowledge, our study is the first to
examine the impact of CEO turnover on reinsurance demand after CEO turnover in the U.S.
property casualty insurance industry. This paper focuses on CEO turnover because the
decision to replace a CEO is one of most important decisions made by directors on the board.
Recent studies affirm the importance of CEO turnover in the corporate governance
issues (e.g., Huson, Parrino, and Starks, 2001; Adams and Mansi, 2009; Campbell,
Gallmeyer, Johnson, Rutherford, and Stanley, 2011; Bushman, Dai, and Wan, 2010; He,
Sommer, and Xie, 2011; He and Sommer, 2011; Cheng, Cummins, and Lin, 2017). Corporate
governance mechanisms may play a disciplining role for poorly performing CEOs that take
on excessive risk (Čihák, Maechler, Schaeck, and Stolz, 2009). A new CEO typically takes
actions that combines operating, investing, and financing policy changes when CEO turnover
occurs because of poor performance (e.g., Weisbach, 1988; Ofek, 1993; Perry, 2000; Huson
et al., 2001; John, Litov, and Yeung, 2008; Adams and Mansi, 2009; He and Sommer, 2011
3
).
CEO turnover events may also affect change in firm performance after the turnover (e.g.,
Denis and Denis, 1995; Huson et al., 2001). However, no research examines whether
reinsurance demand changes after CEO turnovers, which is an important issue in the
insurance industry. In this study, we categorize CEO turnovers into routine (voluntary)
turnover CEOs and non-routine (forced) turnover CEOs.
Reinsurance demand can be separated total reinsurance from affiliated reinsurers into
reinsurance from non-affiliated reinsurers to avoid calculation bias (e.g., Powell and
Sommer, 2007; Wang et al., 2008). Powell and Sommer (2007) suggest that total reinsurance
ratio may be biased because of double counted premiums and retroceded inter-company
pooling arrangement.
3 He and Sommer (2011) determine that stock insurers with CEO turnover are negatively related to prior
performance, but mutual insurers are absent in the U.S. property casualty insurance industry from 1996 to
2004.