Emilio C. Venezian and Chao‐Chun Leng
This paper seeks to use spectral analysis as an alternative method to analyze whether underwriting results exhibit a cyclical behavior for the property‐liability insurance…
Abstract
Purpose
This paper seeks to use spectral analysis as an alternative method to analyze whether underwriting results exhibit a cyclical behavior for the property‐liability insurance industry and by lines of business. In addition, aims to use the AR(2) process to obtain information about cyclical behavior and cycle lengths. Then, the results from the two methods are to be closely examined and compared.
Design/methodology/approach
Spectral analysis and ARIMA are used to obtain cycle lengths, then to compare them to check the consistency of the two methods.
Findings
The AR(2) produced more significant results than spectral analysis.
Originality/value
This is the first article in insurance using significant levels for spectral analysis to decide appropriate cycle lengths. In addition, the consideration of multiple comparisons to get critical values for significance levels reduces false positive and produces more reliable results.
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Keywords
Chao‐Chun Leng and Ursina B. Meier
The paper sets out to use the loss ratio series of Switzerland, Germany, the USA and Japan, to test whether underwriting cycles still exist internationally and to identify…
Abstract
Purpose
The paper sets out to use the loss ratio series of Switzerland, Germany, the USA and Japan, to test whether underwriting cycles still exist internationally and to identify possible structural changes.
Design/methodology/approach
Based on financial theory and insurance pricing theory, co‐integration analysis was performed to check possible causes of structural changes.
Findings
All four countries have breaks in different years. This result leads to the hypothesis that the factors affecting underwriting cycles are mainly country‐specific, such as economic environment and regulations, rather than global/international. Although the financial theory and the insurance pricing theory suggest that the loss ratio series should be co‐integrated with the interest rate series with co‐integrating coefficient −1, the empirical results do not support the theories.
Originality/value
More detailed analysis for the time series characteristics for countries other than the USA is presented to investigate the possible existence of underwriting cycles.
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To examine the existence of underwriting cycles for the property‐liability insurance industry as a whole, and by line of business. Specifically to consider whether the combined…
Abstract
Purpose
To examine the existence of underwriting cycles for the property‐liability insurance industry as a whole, and by line of business. Specifically to consider whether the combined ratio is stationary and stable.
Design/methodology/approach
The augmented Dickey‐Fuller (ADF) test is employed for unit roots, while dummy variable methods, the Chow test, and switching regression are used for stability.
Findings
Underwriting profits of most lines of business and all lines combined are not stationary and have structural changes. For the whole property‐liability industry, a structural change occurred in 1981. Before the change, underwriting cycles existed since combined ratios followed an AR(2) process. After the change, combined ratios are non‐stationary.
Practical implications
Without clear underwriting cycles, there is more difficulty for the insurance industry in pricing and reserving, for regulators in monitoring the financial strength of insurers, and for customers in terms of the affordability and availability of insurance.
Originality/value
The paper recognizes the non‐stationarity of combined‐ratio series, years of structural changes in the insurance industry and specific lines of business, and the possibility that underwriting profit is cointegrated with investment income.
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To examine whether the properties of the combined‐ratio series, an indicator of underwriting profitability in property‐liability insurance, have changed over time.
Abstract
Purpose
To examine whether the properties of the combined‐ratio series, an indicator of underwriting profitability in property‐liability insurance, have changed over time.
Design/methodology/approach
Using the autocorrelation function (ACF) and partial autocorrelation function (PACF), we check whether combined ratios are stationary.
Findings
Underwriting profit has worsened in recent years, and combined ratios are non‐stationary. This characteristic of combined ratios needs further analysis for its impact on underwriting cycles.
Practical implications
Traditional concepts of underwriting cycles, such as predictable cycle lengths and trends, may have changed.
Originality/value
The possibility of a non‐stationary combined‐ratio series is recognized, and the possible existence of non‐stationarity and breaks in combined ratios is introduced.