The purpose of this article is to examine the existence of underwriting cycles in property‐liability insurance for Switzerland, the USA, and Japan over a period of 40 years…
Abstract
Purpose
The purpose of this article is to examine the existence of underwriting cycles in property‐liability insurance for Switzerland, the USA, and Japan over a period of 40 years (1957‐1997), it aims to overcome some of the limitations of a pure autoregressive process of second order (AR(2)).
Design/methodology/approach
Loss‐ratio data for the three countries are used for the recent period 1957‐1997. To test for the existence of cycles and calculate their length, we start with autoregressive processes of second order and include more variables that should be taken into account. We also estimate a cointegration model in order to separate long‐term and short‐term dynamics.
Findings
The hypothesis of cycles of six years in length no longer holds globally and it is necessary to go further than estimating simple AR(2) processes. Different models or specifications seem adequate for different countries because of the varying structure of the insurance markets. Cycles are still found for the USA and most estimations for Switzerland, whereas most specifications for Japan have not revealed cycles.
Originality/value
Most empirical work on underwriting cycles has so far been done on US data. This study investigates insurance cycles for three countries on three continents. Based on the autoregressive process of second order and the estimations presented in the companion to this article (i.e. Part I), the model is extended by inclusion of more variables and some of the time‐series characteristics that were ignored in many previous studies are dealt with.
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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…
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.
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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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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.