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.
Details
Keywords
Aims to address a number of issues related to the use of spectral analysis in the study of insurance cycles.
Abstract
Purpose
Aims to address a number of issues related to the use of spectral analysis in the study of insurance cycles.
Design/methodology/approach
Spectral analysis has seldom been used in the study of insurance cycles. This may be due to the fact that no statistical test is readily available for rejecting the hypothesis that a spectrum is significantly different from random uncorrelated noise in a context in which the period of the alternative is not known. This article suggests one such test.
Findings
In evaluating the proposed test, the relevant critical points, when the number of observations is small, and provided the power of the test is also explored to identify three cyclical processes: a sine process with noise, a second‐order autoregressive process, and the rational expectations process suggested by Cummins and Outreville.
Originality/value
The article provides the first comprehensive analysis and discussion of spectral analysis in the context of insurance‐cycle research.
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Keywords
The purpose of this study is to determine the characteristics of the equilibrium between demand and supply for a reciprocal insurance firm.
Abstract
Purpose
The purpose of this study is to determine the characteristics of the equilibrium between demand and supply for a reciprocal insurance firm.
Design/methodology/approach
The model developed assumes a fixed number of individuals with identical characteristics and of constant absolute risk aversion who can choose between remaining self‐insured or forming a reciprocal insurer to serve their needs.
Findings
The results show that under those conditions the individuals either remain self‐insured or form a reciprocal and buy full insurance. Which of the two decisions will be made depends on the relation between the number of members of the reciprocal and the expenses that will be incurred by that entity.
Research limitations/implications
Most alternative models of insurance demand imply that, in the presence of transaction costs, partial insurance is the rule.
Practical implications
The major practical implication is that there can be serious agency problems in the management of reciprocals if attorneys‐in‐fact have influence over their salaries, since they may be able to increase their private welfare at the expense of that of the policyholders.
Originality/value
The model is new and its practical implications have not been discussed previously.
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This article aims to report the results of research into the effect of expanding the traditional models for valuation of simple securities to include the effect of taxation of the…
Abstract
Purpose
This article aims to report the results of research into the effect of expanding the traditional models for valuation of simple securities to include the effect of taxation of the cash flows from investing and the possibility of bankruptcy of the issuer.
Design/methodology/approach
The models developed use the same techniques as the textbook models but lead to conclusions that are novel.
Findings
In particular, the models suggest that reducing the tax rate on capital gains does not always benefit bondholders and shareholders. For common stock the changes in both market value and realizable value depend not only on the change in tax rate, but also on the growth rate of the dividend stream.
Practical implications
The models presented follow the textbook models, so they assume stationary conditions. Future research should examine the case of conditions that may be mean‐reverting but are not stationary.
Originality/value
The immediate practical implications are in the domain of public policy, where the debate over the effect of tax changes has been based on overly simplified models.
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Emilio C. Venezian, Krupa S. Viswanathan and Iana B. Jucá
Using a game‐theoretic model of insurance markets, Powers and Shubik in 2001 derived a mathematical expression for the optimal number of reinsurers for a given number of primary…
Abstract
Purpose
Using a game‐theoretic model of insurance markets, Powers and Shubik in 2001 derived a mathematical expression for the optimal number of reinsurers for a given number of primary insurers. Subsequently in 2005, Powers and Shubik showed analytically that, for large numbers of primary insurers, this expression is effectively a “square‐root rule”, i.e. the optimal number of reinsurers in a market is given asymptotically by the square root of the total number of primary insurers. In this paper, we test the accuracy of the square‐root rule empirically.
Design/methodology/approach
The numbers of primary insurers and reinsurers existing in a range of 18‐20 different national insurance markets over a period of 11 years are used.
Findings
The empirical results are consistent with the square‐root rule. In addition, we find that the number of reinsurers may also be associated with the market's willingness to pay for risk. When the market's perception of risk is high, there is a greater supply of reinsurance to provide capacity to primary insurers.
Originality/value
An empirical model is presented that deals explicitly with the number of insurers and reinsurers in a market. This is of value to government policymakers and insurance regulators.
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Keywords
The paper aims to examine the practical importance of the finding of Mayers and Smith, that underinvestment is a problem when debt exposed to bankruptcy is part of the financial…
Abstract
Purpose
The paper aims to examine the practical importance of the finding of Mayers and Smith, that underinvestment is a problem when debt exposed to bankruptcy is part of the financial structure.
Design/methodology/approach
The paper examines critically the assumptions underlying the Mayers and Smith paper.
Findings
The necessary assumption of deterministic arbitrage in the market for productive properties used by Mayers and Smith in their model is found to be unrealistic. Even if that assumption were valid, however, the result of Mayers and Smith establishes that raising exposed debt is a negative net present value project for the investor and hence that form of financing would not be found in practice.
Practical implications
The existence of exposed debt does not explain the demand or commercial insurance.
Originality/value
The paper challenges the results of Mayers and Smith that have been used to examine the effect of debt on insurance demand for almost 20 years with mixed results.