Multi‐national underwriting cycles in property‐liability insurance: Part I – some theory and empirical results

Abstract

Purpose

The purpose of this article is to examine the existence of underwriting cycles in property‐liability insurance for Switzerland, the USA, Japan, and West Germany over a period of 40 years (1957‐1997), i.e. it looks at the question of whether the unit price of insurance coverage (given by the inverse of the loss ratio) fluctuates cyclically over time. The article serves as basis and starting point for Part II, where some of the limitations of the model presented here are dealt with.

Design/methodology/approach

Loss ratio data for the four countries are used for the recent period 1957‐1997. To test for the existence of cycles and calculate their length, the article applies autoregressive processes of second order, which were brought to a broader audience by a paper by Cummins and Outreville in 1987. The article also conducts a spectral analysis of the series.

Findings

For West Germany, much longer cycles than in earlier studies were found for the basic model. In general, the cycles get longer for the longer period, 1957‐1997. The article concludes that the hypothesis of cycles of six years in length no longer holds globally. It also finds cross‐country differences for the primary markets of the four countries.

Originality/value

Most empirical work on underwriting cycles has so far been carried out on US data. This study replicates a previous study for four countries on three continents and discusses the results and some limitations. It serves as the basis for Part II of this work.

Citation

Meier, U.B. (2006), "Multi‐national underwriting cycles in property‐liability insurance: Part I – some theory and empirical results", Journal of Risk Finance, Vol. 7 No. 1, pp. 64-82. https://doi.org/10.1108/15265940610637816