An empirical investigation on derivatives usage: evidence from the United Kingdom general insurance industry

Abstract

Abstract This article reports the holdings of derivatives contracts in the UK general insurance industry and investigates the relationship between the usage and insurer organizational characteristics with panel data for the period 1994 to 2002. Overall it seems that the use of derivatives instruments in this industry is limited and shows a downward trend. The empirical results indicate, among other things, that a general insurer's size, liquidity, interest rate risk exposure, line of business concentration and organizational form are important factors associated with the decision to employ derivatives. Notes 1 A t-test and a Brown–Forsythe test also are carried out for equality of means and variances, respectively, and virtually identical results are obtained. 2 The contracts for differences can be futures and options. However, unlike other ordinary futures and options, the contracts for differences can only be settled in cash. 3 Another multinomial logit regression model is estimated with the LMPART dependent variable that takes on the value of 0, 1, 2 or 3 depending on whether firm i does not use any derivatives, uses futures contracts only or contracts for differences only or both, uses options only, or uses all three types, respectively. Similar results are obtained and accordingly not reported. 4 Long (Citation1997) argues that the measure of the marginal effect at the mean is limited and that it is not straightforward to translate the marginal effect into the change in the predicted probability. Thus, this measure is not reported here, although it is a common indicator for regression models for categorical dependent variables.