Dynamics of underwriting profits: Evidence from the U.S. insurance market

Shi-jie Jiang and Chien-Chung Nieh

International Review of Economics & Finance, 2012, vol. 21, issue 1, 1-15

Abstract: U.S. property–liability insurance markets have displayed insurance cycles, with their swings in underwriting profits, for nearly a century. Various hypotheses have been developed to explain these fluctuations, as follows: financial pricing hypothesis, capacity constraint hypothesis, financial quality hypothesis, option pricing approach and economic pricing hypothesis. Consistent with previous studies despite of examining whether variables possess unit roots, performing an ARDL bound test on underwriting profits from 1950 to 2009 demonstrates that the economic pricing hypothesis may be the most suitable model for explaining historical insurance pricing. An evident cyclical pattern in underwriting profits is explained as dynamic feed back to the long-term equilibrium. Considerable evidence suggests that the supply effect of risk-averse insurance companies has dominated U.S. insurance markets during the last half century.

Keywords: Insurance cycle; Underwriting profits; ARDL approach (search for similar items in EconPapers)
JEL-codes: C22 G22 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:21:y:2012:i:1:p:1-15

DOI: 10.1016/j.iref.2011.03.005

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