This paper examines the stock market impact of captive insurance subsidiary formation on parent companies in the United Kingdom (UK) corporate sector. We report that the formation of an insurance captive has no effect on the financial, systematic and unsystematic risks of the parent company, irrespective of the parent's market capitalisation. In addition, there is weak evidence that the market has a negative view of the captive insurance decision. Finally, our results indicate that financial risk, agency costs of free cash flow, asymmetric information and market power have no effect on the stock market's reaction to the captive formation decision.

We examine the relation between outside board directors and six measures of financial performance using panel data for 1999–2012 drawn from the UK’s property-casualty insurance industry. We find that the proportion of outsiders on the board is unrelated to performance; rather it is outsiders’ financial expertise that has the most significant financial performance impact. In addition, superior performance can also be related to the financial expertise of inside directors, thereby reinforcing the importance of board-level financial expertise in the insurance industry. Our results have potential commercial and/or policy implications.

There are two main tax-related arguments regarding the use of reinsurance – the income volatility reduction and the income level enhancement arguments. The income volatility reduction argument contends that firms facing convex tax schedules have incentives to hedge in order to reduce the volatility of their annual taxable income and thereby lower expected tax liabilities [Smith, C.W., Stulz, R.M., 1985. Optimal hedging policies. Journal of Financial and Quantitative Analysis 19, 127–140]. The income level enhancement argument, advanced by Adiel [Adiel, R., 1996. Reinsurance and the management of regulatory ratios and taxes in the property–casualty insurance industry. Journal of Accounting and Economics 22, 207–240], is more specific to hedging via reinsurance. This perspective holds that reinsurance enhances current reported earnings via the receipt of reinsurance commissions and so increases tax liabilities. Consequently, insurance firms with high marginal tax rates should use less reinsurance than those with low marginal tax rates if tax matters. Prior studies using data on financial derivatives have produced mixed results on the validity of the first argument, while Adiel (1996) finds the second argument insignificant in his study of the use of reinsurance by a sample of United States (US) property–liability insurance firms. This study tests the two tax-related arguments using 1992–2001 data for a sample of United Kingdom (UK) life insurance firms. We find that UK life insurers with low before-planning marginal tax rates tend to use more reinsurance; in contrast, tax convexity is found to have no significant impact on the purchase of reinsurance and so the volatility-reduction argument is not supported.