Dynamics of underwriting profits in the US market: Payout patterns and regulation effects

Shi‐jie Jiang, Jeffrey Tzu‐Hao Tsai and Feiyun Xiang

International Journal of Finance & Economics, 2023, vol. 28, issue 3, 3100-3118

Abstract: The empirical investigation of the underwriting profits of six major insurance lines in the US market during 1956–2016 suggests that the data generating process of underwriting profits follows a first‐order autoregressive process for less regulated business lines, whereas highly regulated business lines follow a second‐order autoregressive process. This study verified the long‐run relationships between risk‐free interest rates and underwriting profits for individual lines. Specifically, the long‐run sensitivities of interest rates for less regulated long‐tail lines were greater than those for other lines. We also found that the length of tail acted as a crucial part of the feedback dynamics. The shorter the tails, the greater the tendency to go back to equilibrium, while the longer the tails, the smaller the tendency. In addition, an analysis of cumulative dynamic multipliers showed that the adjustment patterns for the lagged effects of interest rates varied for each business line. The pricing strategies and the safety loading activities of different individual lines were also discussed in this study.

Date: 2023
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