Capacity Constraints and the Dynamics of Underwriting Profits

Matthew L Higgins and Paul D Thistle

Economic Inquiry, 2000, vol. 38, issue 3, 442-57

Abstract: The presence of an underwriting profit cycle in property/liability insurance has become a stylized fact. Models of this "underwriting cycle" imply that the insurance market is governed by two regimes, as capacity is constrained or not. We apply the smooth transition regression model to insurance industry data for 1934-93 to test for a regime shift. We find a rapid shift between two distinct regimes with different dynamics. When capacity is not restricted, we find no evidence of a cycle. The cycle is present in periods when capacity is restricted, immediately following World War II and after 1968. The underwriting cycle appears to be a recent phenomenon. Copyright 2000 by Oxford University Press.

Date: 2000
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