Underwriting Apophenia and Cryptids: Are Cycles Statistical Figments of our Imagination?

  • M Martin BoyerEmail author
  • Iqbal Owadally
Original Article


This paper re-examines the evidence in favour of the existence of underwriting cycles in property and casualty insurance and their economical significance. Using a meta-analysis of published papers in the area of insurance economics, we show that the evidence supporting the existence of underwriting cycles is misleading. There is, in fact, little evidence in favour of insurance cycles with a linear autoregressive character. This means that any cyclicality in firm profitability in the property and casualty insurance industry is not predictable in a classical econometric framework. It follows that pricing in the property and casualty insurance industry is not incompatible with that of a competitive market.


property and liability insurance underwriting profits insurance pricing 



This research was financially supported by the Social Science and Humanities Research Council of Canada. MMB is indebted to J.-François Outreville, Simon van Norden, Éric Jacquier and Michael Powers for comments on an earlier draft, as well as to Tolga Cenesizoglu for continuing discussions. MMB would also like to thank conference participants at the Munich Behavioral Insurance Seminar for listening to a previous iteration of this research project, and to the 2012 EGRIE participants in Palma and to the 2013 Risk Theory Society members—especially Richard Peter—for very stimulating discussions. IO thanks Douglas Wright, Feng Zhou and Dorina Lazar for valuable discussions.


  1. Abdi, H. (2007) ‘Bonferroni test’, in N.J. Salkind (ed.) Encyclopedia of Measurement and Statistics, Thousand Oaks, CA: Sage Publishing, pp. 104–108.Google Scholar
  2. Baker, T. (2005) ‘Medical malpractice and the insurance underwriting cycle’, DePaul Law Review 54 (2): 393–396.Google Scholar
  3. Baranoff, D. (2003) ‘A policy of cooperation: The cartelisation of American fire insurance, 1873–1906’, Financial History Review 10 (2): 119–136.CrossRefGoogle Scholar
  4. Berger, L.A., Cummins, J.D. and Tennyson, S. (1992) ‘Reinsurance and the liability insurance crisis’, Journal of Risk and Uncertainty 5 (3): 253–272.CrossRefGoogle Scholar
  5. Born, P. and Viscusi, W.K. (2006) ‘The catastrophic effects of natural disasters on insurance markets’, Journal of Risk and Uncertainty 33 (1–2): 55–72.CrossRefGoogle Scholar
  6. Boyer, M.M., Eisenmann, J. and Outreville, J.-F. (2011) Underwriting cycles and underwriter sentiment, Munich: Behavioral Insurance Workshop, 12–13 December 2011.Google Scholar
  7. Boyer, M.M., Jacquier, E. and Van Norden, S. (2012) ‘Are underwriting cycles real and forecastable?’ The Journal of Risk and Insurance 79 (4): 995–1015.CrossRefGoogle Scholar
  8. Brockett, P.L. and Witt, R.C. (1982) ‘The underwriting risk and return paradox revisited’, The Journal of Risk and Insurance 49 (4): 621–627.CrossRefGoogle Scholar
  9. Chen, R., Wong, K. and Lee, H. (1999) ‘Underwriting cycles in Asia’, The Journal of Risk and Insurance 66 (1): 29–47.CrossRefGoogle Scholar
  10. Choi, S., Hardigree, D. and Thistle, P.D. (2002) ‘The property/liability insurance cycle: A comparison of alternative models’, Southern Economic Journal 68 (3): 530–548.CrossRefGoogle Scholar
  11. Cummins, J.D. (2006) ‘Should the government provide insurance for catastrophes?’ Federal Reserve Bank of St. Louis Review 88 (4): 337–379.Google Scholar
  12. Cummins, J.D. and Danzon, P.M. (1997) ‘Price, financial quality, and capital flows in insurance markets’, Journal of Financial Intermediation 6 (1): 3–38.CrossRefGoogle Scholar
  13. Cummins, J.D. and Doherty, N.A. (2002) ‘Capitalization of the property-liability insurance industry: Overview’, Journal of Financial Services Research 21 (1–2): 5–14.CrossRefGoogle Scholar
  14. Cummins, J.D. and Outreville, J.F. (1987) ‘An international analysis of underwriting cycles’, The Journal of Risk and Insurance 54 (2): 246–262.CrossRefGoogle Scholar
  15. Cummins, J.D. and Phillips, R.D. (2000) ‘Applications of financial pricing models in property-liability insurance’, in G. Dionne (ed.) Handbook of Insurance, Boston, MA: Kluwer Academic Publishers, pp. 621–655.CrossRefGoogle Scholar
  16. Derien, A. (2008) ‘An empirical investigation of the factors of the underwriting cycles in non-life market’, in Proceedings of MAF 2008: International Conference Mathematical and Statistical Methods for Actuarial Sciences and Finance, Venice, Italy: 26–28 March 2008.Google Scholar
  17. Doherty, N.A. and Garven, J.R. (1995) ‘Insurance cycles: Interest rates and the capacity constraint model’, The Journal of Business 68 (3): 383–404.CrossRefGoogle Scholar
  18. Doherty, N.A. and Kang, H.B. (1988) ‘Interest rates and insurance price cycles’, Journal of Banking and Finance 12 (2): 199–214.CrossRefGoogle Scholar
  19. Fields, J.A. and Venezian, E.C. (1989) ‘Interest rates and profit cycles: A disaggregated approach’, The Journal of Risk and Insurance 56 (2): 312–319.CrossRefGoogle Scholar
  20. Fitzpatrick, S.M. (2004) ‘Fear is the key: A behavioral guide to underwriting cycles’, Connecticut Insurance Law Journal 10 (2): 255–275.Google Scholar
  21. Grace, M. and Hotchkiss, J. (1995) ‘External impacts on the property-liability insurance cycle’, The Journal of Risk and Insurance 62 (4): 738–754.CrossRefGoogle Scholar
  22. Gron, A. (1994a) ‘Evidence of capacity constraints in insurance markets’, The Journal of Law and Economics 37 (2): 349–377.CrossRefGoogle Scholar
  23. Gron, A. (1994b) ‘Capacity constraints and cycles in property-casualty insurance markets’, The RAND Journal of Economics 25 (1): 110–127.CrossRefGoogle Scholar
  24. Gron, A. (2010) Insurance Price and Profit Dynamics: Underwriting Cycles Can Occur in Competitive Markets, Insurance and Financial Services Committee Newsletter, Spring 2010, Chicago, IL: American Bar Association.Google Scholar
  25. Haley, J.D. (1993) ‘A cointegration analysis of the relationship between underwriting margins and interest rates: 1930–1989’, The Journal of Risk and Insurance 60 (3): 480–493.CrossRefGoogle Scholar
  26. Hamilton, J.D. (1994) Time Series Analysis, Princeton: Princeton University Press.Google Scholar
  27. Harrington, S.E. (2004) Tort liability, insurance rates, and the insurance cycle. Brookings-Wharton Papers on Financial Services, pp. 97–138.Google Scholar
  28. Harrington, S.E. and Danzon, P.M. (1994) ‘Price cutting in liability insurance markets’, The Journal of Business 67 (4): 511–538.CrossRefGoogle Scholar
  29. Harrington, S.E. and Niehaus, G. (2000) ‘Volatility and underwriting cycles’, in G. Dionne (ed.) Handbook of Insurance, Boston, MA: Kluwer Academic Publishers, pp. 657–686.CrossRefGoogle Scholar
  30. Harrington, S.E. and Yu, T. (2003) ‘Do property-casualty insurance underwriting margins have unit roots?’ The Journal of Risk and Insurance 70 (4): 715–733.CrossRefGoogle Scholar
  31. Hartwig, R.P. (2011) Is the World Becoming a Riskier Place? Economic Overview and P/C Insurance Industry Outlook for 2012 & Beyond, New York: Insurance Information Institute.Google Scholar
  32. Jawadi, F., Bruneau, C. and Sghaier, N. (2009) ‘Nonlinear cointegration relationships between non-life insurance premiums and financial markets’, The Journal of Risk and Insurance 76 (3): 753–783.CrossRefGoogle Scholar
  33. KPMG (2002) Study into the methodologies to assess the overall financial position of an insurance undertaking from the perspective of prudential supervision, prepared for the European Commission, contract No. ETD/2000/BS-3001/C/45.Google Scholar
  34. Lamm-Tennant, J., Starks, L.T. and Stokes, L. (1992) ‘An empirical Bayes approach to estimating loss ratios’, The Journal of Risk and Insurance 59 (3): 426–442.CrossRefGoogle Scholar
  35. Lamm-Tennant, J. and Weiss, M.A. (1997) ‘International insurance cycles: Rational expectations/institutional intervention’, The Journal of Risk and Insurance 64 (3): 415–439.CrossRefGoogle Scholar
  36. Lazar, D. and Denuit, M. (2012) ‘New evidence for underwriting cycles in US property-liability insurance’, The Journal of Risk Finance 13 (1): 4–12.CrossRefGoogle Scholar
  37. Meier, U.B. (2006a) ‘Multi-national underwriting cycles in property-liability insurance: Part 1 — Some theory and empirical results’, The Journal of Risk Finance 7 (1): 64–82.CrossRefGoogle Scholar
  38. Meier, U.B. (2006b) ‘Multi-national underwriting cycles in property-liability insurance: Part 2 — Model extension and further empirical results’, The Journal of Risk Finance 7 (1): 83–97.CrossRefGoogle Scholar
  39. Meier, U.B. and Outreville, J.-F. (2006) ‘Business cycle in insurance and reinsurance: The case of France, Germany and Switzerland’, The Journal of Risk Finance 7 (2): 160–176.CrossRefGoogle Scholar
  40. Nelson, C. R. and Plosser, C.I. (1982) ‘Trends and random walks in macroeconomic time series: Some evidence and implications’, Journal of Monetary Economics 10 (2): 139–162.CrossRefGoogle Scholar
  41. Niehaus, G. and Terry, A. (1993) ‘Evidence on the time series properties of insurance premiums and causes of the underwriting cycle: New support for the capital market imperfection hypothesis’, The Journal of Risk and Insurance 60 (3): 466–479.CrossRefGoogle Scholar
  42. Outreville, J.F. (1990) ‘Underwriting cycles and rate regulation in automobile insurance markets’, Journal of Insurance Regulation 9 (2): 274–286.Google Scholar
  43. Sargent, T. (1987) Macroeconomic Theory, 2nd edn, Boston: Academic Press.Google Scholar
  44. Stock, J. and Watson, M. (1988) ‘Variable trends in economic time series’, Journal of Economic Perspectives 2 (3): 147–174.CrossRefGoogle Scholar
  45. Stralkowski, C.M. (1968) ‘Lower order autoregressive-moving average stochastic models and their use for the characterization of abrasive cutting tools’, PhD thesis, University of Wisconsin – Madison.Google Scholar
  46. Tarr, F. (2008) An investigation into the existence of underwriting cycles in the South African primary marine insurance market: 1925–2006. Unpublished thesis, University of the Witwatersrand, Johannesburg.Google Scholar
  47. Trufin, J., Albrecher, H. and Denuit, M. (2009) ‘Impact of underwriting cycles on the solvency of an insurance company’, North American Actuarial Journal 13 (3): 385–403.CrossRefGoogle Scholar
  48. Venezian, E. (1985) ‘Ratemaking methods and profit cycles in property and liability insurance’, The Journal of Risk and Insurance 52 (3): 477–500.CrossRefGoogle Scholar
  49. Venezian, E. (2006) ‘The use of spectral analysis in insurance cycle research’, The Journal of Risk Finance 7 (2): 177–188.CrossRefGoogle Scholar
  50. Venezian, E. and Leng, C.-C. (2006) ‘Application of spectral and ARIMA analysis to combined-ratio patterns’, The Journal of Risk Finance 7 (2): 189–214.CrossRefGoogle Scholar
  51. Wang, S.S., Major, J.A., Pan, C.H. and Leong, J.W.K. (2010) U.S. property-casualty:Underwriting cycle modeling and risk benchmarks, joint research paper of Risk Lighthouse LLC and Guy Carpenter & Company, LLC.Google Scholar
  52. Winter, R.A. (1991) ‘The liability insurance market’, The Journal of Economic Perspective 5 (3): 115–136.CrossRefGoogle Scholar
  53. Winter, R.A. (1994) ‘The dynamics of competitive insurance markets’, The Journal of Financial Intermediation 3 (4): 379–415.CrossRefGoogle Scholar
  54. Zanjani, G. (2004) Mutuality and the underwriting cycle: Theory with evidence from the Pennsylvania fire insurance market, 1873–1909. unpublished manuscript, Federal Reserve Bank of New York.Google Scholar
  55. Zellner, A. (1971) An Introduction to Bayesian Inference in Econometrics, New York: Wiley.Google Scholar

Copyright information

© The International Association for the Study of Insurance Economics 2014

Authors and Affiliations

  1. 1.Département de la Finance, HEC Montréal (Université de Montréal)MontréalCanada
  2. 2.Cass Business School, City University LondonLondonU.K.

Personalised recommendations