Dynamics of underwriting profits: Evidence from the U.S. insurance market

Publication year: 2012
Source: International Review of Economics & Finance, Volume 21, Issue 1, January 2012, Pages 1-15

Shi-jie, Jiang , Chien-Chung, Nieh

U.S. property–liability insurance markets have displayed insurance cycles, with their swings in underwriting profits, for nearly a century. Various hypotheses have been developed to explain these fluctuations, as follows: financial pricing hypothesis, capacity constraint hypothesis, financial quality hypothesis, option pricing approach and economic pricing hypothesis. Consistent with previous studies despite of examining whether variables possess unit roots, performing an ARDL bound test on underwriting profits from 1950 to 2009 demonstrates that the economic pricing hypothesis may be the most suitable model for explaining historical insurance pricing. An evident cyclical pattern in underwriting profits is explained as dynamic feed back to…