INSURANCE CYCLES: INTEREST RATES AND THE CAPACITY CONSTRAINT MODEL
Neil A. Doherty and
James R. Garven
Risk and Insurance from EconWPA
Although financial pricing models imply that profits of property-liability insurance firms should conform to an unpredictable time series process, cycles are widely reported. Some controversy exists as to whether the "underwriting cycle" is a mere accounting artifact or whether it has real resource effects. We show that changes in interest rates simultaneously affect the insurer's capital structure and the equilibrium level of underwriting profit. Depending on factors such as asset and liability durations, access to capital markets, and availability of capital substitutes such as reinsurance, insurers will be differently affected by changing interest rates. Over time, we find that the average market response to changing interest rates roughly tracks market clearing prices, although the response is somewhat dampened. However, firms with mismatched assets and liabilities, as well as those with more costly access to new capital and reinsurance, are more likely to respond to interest rate changes by either rationing supply or instituting abnormal price changes.
Note: Postscript (ASCII) RMI CYCLE
References: Add references at CitEc
Citations Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpri:9407001
Access Statistics for this paper
More papers in Risk and Insurance from EconWPA
Bibliographic data for series maintained by EconWPA ().