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