The purpose of this paper is to investigate empirically the relationship between property‐liability insurance premiums and economic and financial development in the case of…
Abstract
Purpose
The purpose of this paper is to investigate empirically the relationship between property‐liability insurance premiums and economic and financial development in the case of Portugal, assuming a supply‐leading causality pattern of development. In other words, the expansion of the financial system precedes the demand for services.
Design/methodology/approach
The paper conducts OLS estimations between premiums and the gross domestic product (GDP) in order to evaluate the economic growth, in addition to the ratio of the broader definition of money (M2) to GDP and the ratio of currency to demand deposits (M1/M2), in order to assess financial development.
Findings
The level of the gross domestic product is the only factor explaining the level of property‐liability insurance demand in Portugal.
Originality/value
To the best of the author's knowledge, this is the first attempt to examine determinants of property‐liability casualty insurance in Portugal, using time series data.
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Ursina B. Meier and J. François Outreville
This article aims to examine the existence of an underwriting cycle in property‐liability insurance for France, Germany and Switzerland (primary markets) and for the European…
Abstract
Purpose
This article aims to examine the existence of an underwriting cycle in property‐liability insurance for France, Germany and Switzerland (primary markets) and for the European reinsurance industry. It is also aimed to test how the two markets are related with each other in each country and how they influence each other.
Design/methodology/approach
Loss ratio data for France, Germany and Switzerland are used for the recent period 1982‐2001 in connection with the price of reinsurance in Europe as well as the money market rate. To test for the existence of cycles and calculate their length auto‐regressive processes of second order are applied.
Findings
There are cross‐country differences for the primary markets of the three countries. The reinsurance price index is highly cyclical with a calculated cycle length of almost nine years. It is shown that the reinsurance price index has a strong influence on the primary market loss ratios of the three countries studied.
Originality/value
With the exception of two studies examining the impact of reinsurance on insurance prices and profits, there has been no research as yet to determine the role of reinsurance on the cyclical behavior of underwriting results. This gap is filled here by an empirical study on three European countries.
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This paper aims to revisit the assumption of the cyclicality of the property-liability insurance market and identify a scenario in which the so-called underwriting cycles are…
Abstract
Purpose
This paper aims to revisit the assumption of the cyclicality of the property-liability insurance market and identify a scenario in which the so-called underwriting cycles are unpredictable, according to a dynamic cash flow model which generates non-cyclical output dynamics.
Design/methodology/approach
This paper is on the intersection of real business cycle models and financial cycles. The authors construct a dynamic model of an insurer’s cash flows with stochastic loss shocks and capacity constraints, in which loss shocks have a dual impact on both underwriting profits and access to external capital. They simulate the insurer’s optimal output responses to loss shocks, including output movements in underwriting coverage and external capital, to explore the source of unpredictable underwriting cycles through linear quadratic approximation in the model economy.
Findings
The authors find that the effect of loss shocks on the insurer’s cash flows could spread out and amplify over time because of the dynamic interaction between its underwriting capability and ability to raise external capital. This dynamic interaction can generate a non-cyclical pattern of changes in underwriting coverage and access to external capital in the benchmark economy. Applied to different experimental economies, the simulation results reveal that the determinants of the level of output fluctuations include the size of loss shocks, the sensitivity of capital market to loss shocks and the tightness of capital market.
Originality/value
To the best of the authors’ knowledge, there has been no attempt to study insurance output cyclicality with a dynamic cash flow model based upon the real business cycle literature, in which the dynamic interaction between underwriting and access to external capital because of loss shocks has an amplifying effect on output markets. This paper contributes to the current body of research by being able to simulate and show the insurance output dynamics resulting from the amplifying effect under capacity constraints.
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The purpose of this study is to analyze product diversification, business structure and insurer performance with a comprehensive look at the property-liability (P/L) insurance…
Abstract
Purpose
The purpose of this study is to analyze product diversification, business structure and insurer performance with a comprehensive look at the property-liability (P/L) insurance operations.
Design/methodology/approach
Using a panel data, this study employs an ordinary least squares regression model, fixed effects model and random effects model to examine the impact of product diversification and business structure on the performance of P/L insurers. The study assesses insurer performance using both risk-adjusted return on assets and risk-adjusted return on equity.
Findings
The study finds that product diversification is significantly negatively related to the performance of P/L insurers. The results are consistent with the diversification discount theory. The empirical results reveal that business lines have significant impacts on firm performance, particularly on the lines of fire and marine insurances. Furthermore, the interaction between product diversification and firm size implies that product diversification significantly increases the performance of large-sized insurance firms.
Originality/value
The study provides some valuable insights into the effects of diversification and business structure on the performance of P/L insurers in a developing country. The study’s findings suggest that management of P/L insurers should clarify their objectives and carefully assess the company’s resources when dealing with product diversification and business structure. The results have practical implications for the financial services industry in Taiwan.
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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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According to the market competition theory, a firm’s decision-making is influenced by the behaviors or strategies of its competitors. The repercussions of competition include…
Abstract
Purpose
According to the market competition theory, a firm’s decision-making is influenced by the behaviors or strategies of its competitors. The repercussions of competition include market-stealing and spillover effects. Relatively few studies in the reinsurance literature discuss the effect of competitors on an insurer’s decision-making. This study aims to fill a gap in the reinsurance literature by comparing insurers' reinsurance demand to their competitors' reinsurance purchases.
Design/methodology/approach
This study uses unbalanced panel data for the US property-liability insurance industry from 2006 to 2017 to determine the impact of competitors' reinsurance purchases on insurers' reinsurance demand. This study employs the Mixed Effect Model and the Quantile Regression to test the proposed hypotheses.
Findings
The evidence suggests that the affiliated reinsurance purchases of competitors have a positive and substantial effect on the affiliated reinsurance demand of insurers, crediting mimicking the reinsurance strategy. Interestingly, the market-stealing effect is supported while the non-affiliated reinsurance metric is used. Remarkably, given insurers with low non-affiliated reinsurance purchases, the finding sustains the mimicking reinsurance strategy. Nevertheless, the market-stealing effect remains a concern for insurers with a high non-affiliated reinsurance purchase.
Originality/value
The new findings concerning competitor effects analysis fill a void in the reinsurance literature. Risk diversification, capital substitution, and real services demand may play a crucial role in determining the market-stealing effect, leading to a decrease in market share. Insurers can mitigate the market-stealing effect of competitors by accessing expertise and capital substitution through non-affiliated reinsurance purchases.
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Yayun Yan and Sampan Nettayanun
Our study explores friction costs in terms of competition and market structure, considering factors such as market share, industry leverage levels, industry hedging levels, number…
Abstract
Our study explores friction costs in terms of competition and market structure, considering factors such as market share, industry leverage levels, industry hedging levels, number of peers, and the geographic concentration that influences reinsurance purchase in the Property and Casualty insurance industry in China. Financial factors that influence the hedging level are also included. The data are hand collected from 2008 to 2015 from the Chinese Insurance Yearbook. Using panel data analysis techniques, the results are interesting. The capital structure shows a significant negative relationship with the hedging level. Group has a negative relationship with reinsurance purchases. Assets exhibit a negative relationship with hedging levels. The hedging level has a negative relation with the individual hedging level. Insurers have less incentive to hedge because it provides less resource than leverage. The study also robustly investigates the strategic risk management separately by the financial crises.
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This study aims to investigate the relationship between boardroom gender diversity (BoGD) and risk-taking by property-liability (P-L) stock insurers from an analytical framework…
Abstract
Purpose
This study aims to investigate the relationship between boardroom gender diversity (BoGD) and risk-taking by property-liability (P-L) stock insurers from an analytical framework that control for organizational form and ownership structure. It relies on the behavioral agency model, the resource dependency theory and the concept of socioemotional wealth (SEW).
Design/methodology/approach
This study builds on an unbalanced panel of 2,285 firm-year observations from 232 European and US P-L stock insurers covering the period 2010–2019 and measure risk-taking by using four proxies: total risk (TR), upside risk (UpR), downside risk (DwR) and default risk (DR). Reverse causality and endogeneity concerns are treated by applying different approaches.
Findings
Findings suggest that BoGD mitigates the TR, DwR and DR but does not interfere with the UpR, which conceptualizes firm expectations to enhance patrimony and safeguard SEW for heirs, especially in family-owned insurers. The findings hold in various robustness checks including endogeneity and alternative specifications of BoGD and risk-taking.
Practical implications
This study contributes to practice by contrasting the role of female directors’ bevahior when assuming risk, which seems significantly different depending on the risk-taking specification and the organizational form. The author advises policyholders and policymakers to look at closely on BoGD and ownership structure as they affect insurance company risk-taking.
Originality/value
This study takes a more direct approach to highlight the BoGD’s effect on corporate risk-taking by focusing on the insurance sector which is characterized by risk and uncertainty bearing. To the best of the author’s knowledge, this is the first study to consider the full range of the stock organizational forms and the degree of family control in displaying this effect in both widely traded and closely traded insurers and to assess risk-taking from both market-based and accounting-based aspects.
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Dorina Lazar and Michel Denuit
The purpose of this paper is to highlight some testing procedures, both in time/frequency framework, useful to test for significant cycles in insurance data. The US underwriting…
Abstract
Purpose
The purpose of this paper is to highlight some testing procedures, both in time/frequency framework, useful to test for significant cycles in insurance data. The US underwriting cycle is measured using the growth rates of real premiums.
Design/methodology/approach
In addition to the traditional AR(2) model, two new approaches are suggested: testing for a significant peak in the periodogram using Fisher g test and a nonparametric version of it, and testing for unit root cycles in insurance data.
Findings
All approaches find empirical evidence for a cyclical behaviour of the growth rates of property‐liability real premiums. Results on the length of dominant cycle still diverge, according to the approach (time/frequency domain).
Originality/value
Compared to the existing literature, the present study innovates in that it highlights additional testing procedures, helpful to detect significant cycles in insurance time series. The underwriting cycle is analysed through the growth rates of real premiums.
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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.