U.S. Reinsurance Prices, Financial Quality, and Global Capacity

The puzzle of underwriting cycles and insurance crises in property‐liability insurance has led to numerous economic hypotheses and analyses, yet no single theory seems capable of explaining all of its aspects. Reinsurance is hypothesized to be a potential factor in observed cycles in the primary market; despite this, few underwriting cycle studies focus on reinsurance. The purpose of this research is to investigate determinants of reinsurance prices in the U.S. Nonproportional reinsurance is highlighted, since it is designed to cover the tail of the loss distribution and is considered to be relatively riskier than proportional reinsurance as a result. Separate samples of professional U.S. reinsurers for property and for casualty are studied, based upon the reinsurers' writings of property versus casualty nonproportional reinsurance. The sample period is 1991–1995. The results support both the capacity constraint hypothesis and the risky debt hypothesis, and this is the first research to support both. A major innovation in this study is the use of capacity variables that are broken down by major region of the world.     

The Theory of Optimal Stochastic Control as Applied to Insurance Underwriting Cycles

We use the theories of optimal stochastic control and engineering process control to analyze the well-known phenomenon of insurance underwriting cycles in continuous time. We show in a continuous time framework that underwriting cycles can be explained with a model where premiums are set rationally, but where there are various reporting and regulatory lags. We find that the observed cycle length depends on the length of these underlying lags. Our result can be seen as consistent with previous empirical work showing underwriting cycles varying across countries and lines of insurance. In the event that no lags exist, our result is also consistent with more recent literature suggesting that insurance cycles may not exist.     

非寿险承保风险引发系统性风险的复杂网络分析

本文基于我国财险业2009~2018年数据,用复杂网络理论模型构建了财险业承保业务网络,并模拟了承保风险传染过程,分析了承保风险对财险业系统性风险的影响轨迹及程度。研究发现,我国财险业承保业务网络的联系越来越密切,承保风险的增加会引发传染风险,进而导致爆发系统性风险。但当前我国财险业整体稳定,只有发生1600亿元及以上的初始损失时,才会有保险机构陷入危机;当初始损失大于8500亿元时,才会有保险机构因传染风险而陷入危机。在承保风险的传染过程中,损失至少以数倍的速度下降;保险机构主要在承保风险和前两轮传染中损失较大,在后续传染轮次陷入危机的可能性极低。因此,防范巨灾风险、监管重点公司、探索巨灾转移机制并建立承保风险预警机制显得比较重要。     

Versicherungszyklen in der deutschen KFZ-Versicherung

In this paper we analyze underwriting cycles in the German motor insurance industries for the last 50 years. A special emphasis is laid on the so-called aggregation bias that arises when data from different lines of business is merged in a total market statistic. In literature, underwriting cycles were found for many international markets and for numerous lines of business. We find underwriting cycles for the German motor insurance with lengths between six and ten years, which have been increasing for the last years. Our empirical evidence on cycle lengths in German motor insurance fits well into the context of international comparative studies on underwriting cycles.     

The Dynamics of Insurance Prices

We develop a continuous-time general-equilibrium model to rationalise the dynamics of insurance prices in a competitive insurance market with financial frictions. Insurance companies choose underwriting and financing policies to maximise shareholder value. The equilibrium price dynamics are explicit, which allows simple numerical simulations and generates testable implications. In particular, we find that the equilibrium price of insurance is (weakly) predictable and the insurance sector always realises positive expected profits. Moreover, rather than true cycles, insurance prices exhibit asymmetric reversals caused by the reflection of the aggregate capacity process at the dividend and recapitalisation boundaries.     

Do Property‐Casualty Insurance Underwriting Margins Have Unit Roots?

A growing literature analyzes determinants of insurance prices using time series data on insurer underwriting margins. If the variables analyzed are stationary, conventional regression models may be appropriately used to test hypotheses. Based on pretests for a unit root, several studies have instead used co‐integration analysis to analyze the long‐run relationship between purportedly nonstationary underwriting margins and macroeconomic variables. We apply a battery of unit root tests to investigate whether underwriting margins are stationary under different assumptions concerning deterministic components in the data generating process (DGP). When linear and/or quadratic trends are included in the assumed DGPs, the tests reject the null hypothesis of a unit root for loss ratios, expense ratios, combined ratios, and economic loss ratios from 1953 through 1998 for many of the individual lines examined and for all lines combined. Consistent with prior work on whether macroeconomic variables have unit roots, a simulation of test power for underwriting margins during the sample period demonstrates that nonrejections of the null hypothesis of a unit root could easily reflect low power. The overall findings suggest that conventional regression methods can be used appropriately to analyze underwriting margins after controlling for deterministic influences and transforming any nonstationary regressors.     

Does operating risk affect portfolio risk? Evidence from insurers' securities holding

This study empirically examines, in the setting of insurance companies, the hypothesis that investors facing more operating risk may behave as if they were more risk averse in investment decisions. Specifically, we study how operating risk from underwriting insurance policies affects insurers' risk taking behavior in their portfolio investments. We find that insurers with higher volatilities in underwriting incomes and cash flows are more conservative in their financial investment risk taking – they have lower credit risk exposure in their bond investments, as well as lower portfolio weights on risky bonds and equities. Further, insurers' portfolio risk exposure is sensitive to the risk of permanent underwriting income shocks but insensitive to the risk of transitory shocks. Transitory operating risk, however, is significantly related to portfolio risk when insurers face tight financing constraints. Our findings suggest a substitutive effect of operating risk on investment decisions by financial institutions.     

Product-market strategy and underwriting performance in the United Kingdom’s property–casualty insurance market

Drawing on a framework from the organizational economics literature, we utilize a panel data design to examine empirically the effect of motor insurance and liability insurance business on the overall underwriting performance of insurers operating in the United Kingdom’s (UK) property–casualty insurance market. We find that participation in liability insurance contributes positively to underwriting performance, whereas motor insurance is associated with inferior underwriting performance. Additionally, we find that higher reinsurance ratio is associated with better underwriting performance, but reduced profit margins. Our results show that higher leverage too is associated with better underwriting performance. We conclude that our results could have potentially important commercial and/or policy implications.     

Are Underwriting Cycles Real and Forecastable?

Speculative efficiency often requires that future changes in a series cannot be forecast. In contrast, series with a cyclical component would seem to be forecastable with decreases, possibly relative to a trend, during the upper part of the cycle and increases during the lower part. On the basis of autoregressive model (AR) estimates, it is considered that there is strong evidence of cycles in insurance underwriting performance as measured by the premium‐to‐loss ratio. Indeed, a large literature attempts to explain this documented cyclicality. First, we show that the parameter estimates from AR models do not lead to any such inference and that in the contrary, the evidence in the data is consistent with no cyclicality at all. Second, we show that a number of different filters lead to the same conclusion: that there is no evidence of in‐sample or out‐of‐sample predictability in annual insurance underwriting performance in the United States.     

我国经济周期对非寿险承保周期的影响研究

采用HP滤波法对我国1999年～2011年季度非寿险市场承保赔付率进行研究,发现我国存在3～5年的非寿险承保利润周期现象。通过建立回归模型分析方法证明经济周期对承保利润率周期有显著影响,进而采用VAR模型的脉冲响应和方差分解考查经济周期对承保周期的具体贡献率。研究结果表明整个经济变量波动共同解释作用达到22%,远远超过了其他干扰项带来的影响。     

我国产险公司承保亏损原因分析及建议

近年来,我国产险市场保持快速增长,但自2006年起承保效益连续出现大面积亏损,严重影响产险公司偿付能力。本文分析了产险公司承保效益情况,并剖析了造成普遍亏损的原因,认为要扭转产险行业普遍亏损的现状,保险企业要转变经营理念,提升自身经营绩效及经营水平;保险监管部门要在尊重市场规律基础上,推出有效的监管措施,为促进有序竞争提供制度保障。     

Recent Research Developments Affecting Nonlife Insurance—The CAS Risk Premium Project 2012 Update

This article reports the main results of the 2012 Risk Premium Project update, a yearly review of actuarial and finance literature on the theory and empirics of risk assessment for property–casualty insurance. Pricing and modeling insurance risks and methodological advancement in risk valuation were popular fields of research in 2012. Of special note is new work on behavioral pricing and liquidity. Additionally, underwriting cycles attracted some controversy, and emerging risks, such as systemic risk and potential interrelations between insurance and other financial markets, were also areas of intense discussion.     

Convergence of Insurance and Financial Markets: Hybrid and Securitized Risk-Transfer Solutions

One of the most significant economic developments of the past decade has been the convergence of the financial services industry, particularly the capital markets and (re)insurance sectors. Convergence has been driven by the increase in the frequency and severity of catastrophic risk, market inefficiencies created by (re)insurance underwriting cycles, advances in computing and communications technologies, the emergence of enterprise risk management, and other factors. These developments have led to the development of hybrid insurance/financial instruments that blend elements of financial contracts with traditional reinsurance as well as new financial instruments patterned on asset-backed securities, futures, and options that provide direct access to capital markets. This article provides a survey and overview of the hybrid and pure financial markets instruments and provides new information on the pricing and returns on contracts such as industry loss warranties and Cat bonds.     

我国财产保险市场承保效益影响因素分析

近年来,我国产险市场业务呈现快速增长态势,竞争主体迅速增多,市场集中度不断下降,竞争越来越激烈.市场不规范现象经常出现,费率下降,各家保险企业的承保效益出现普遍亏损现象,直接影响了行业的可持续发展和削弱了我国产险企业的市场竞争力.基于此,本文以我国产险市场上10家产险企业为样本,以2004至2008年的数据进行面板回归...     

Are health insurers in multiple lines of business less profitable? An examination of scope economies in health insurance

In markets where companies can offer multiple products or services, production costs may decline, and profitability may increase as business scope expands. Using a sample of health insurers from 2015 to 2018 with data reported in the annual NAIC Supplemental Health Care Exhibit, we test whether scope economies exist among health insurers. We evaluate the relationship between scope and four profitability metrics—the medical loss ratio, the expense ratio, the underwriting profit ratio, and a profit efficiency measure obtained using a data envelopment analysis technique. We test two competing hypotheses from prior literature on scope economies in insurance. The strategic focus hypothesis states performance is higher for insurers that specialize in one line of business. The conglomeration hypothesis states performance is higher for insurers that operate in multiple lines of business. Our results provide evidence in support of the strategic focus hypothesis among US health insurers.     

Impact of Underwriting Cycles on the Solvency of an Insurance Company

Abstract

This paper studies the solvency of an insurance firm in the presence of underwriting cycles. A small or medium-size insurance company with a price-taker position in the market is considered. Its premium income is assumed to obey an autoregressive process with cycles. Specifically, the premium income for a specific calendar year is influenced by the market experience for the last couple years. Under this classical AR(2) dynamics governing the premium income, an explicit expression for the ultimate ruin probability is derived, using a martingale approach, in the lighttailed claims case. Furthermore, the logarithmic asymptotic behavior of the ultimate ruin probability as well as the typical path to ruin are investigated. Then a comparison is made with the classical case where the same company operates on a market without such cycles. Asymptotically, the presence of market cycles is shown to increase the risk for the company. Numerical illustrations are performed on Canadian motor insurance market data and support the theoretical analysis.     

Underwriting and investment risks in the property-liability insurance industry: evidence prior to the 9–11 event

Underwriting and investment are two important and related business activities of insurance companies. However, studies on the interrelation between underwriting and investment risks of Property-Liability (P-L) insurance companies are sparse in the literature. Using a sample of US P-L insurers, this article conducts an empirical investigation of how these two risks are associated with each other in the 1994–2000 period (before the September 11th terrorist attack in 2001). Our results, robust to various estimations, suggest that there is no significant relationship between the underwriting and investment risks among our sample firms. Such results based on pre 9–11 event period provide some support for the conjecture of Achleitner et al. (Geneva Pap Risk Insur Issues Pract 27:275–282, 2002) that many insurance companies may have failed to take an integrated approach to risk management. This resulted in a heavy loss due to dual exposures in both underwriting and investment in the 9–11 event. In the aftermath of the recent global financial crisis, risk taking and risk management of financial institutions have received more attention and increasing scrutiny. We believe the current paper provides some useful insights in this vein.     

隧道施工造成的环境损失分析理论在工程保险中的应用研究

城市轨道交通建设中涉及第三者财产损失的事故占有相当比例。近年来,已有较多的工程风险基本理论及风险管理方面的研究成果,然而针对隧道的风险管理却应用较少,特别是基于量化方法的风险分析研究比较缺乏,这导致了工程风险分析和工程保险工作一直缺乏数理分析依据。文章在盾构隧道施工的环境风险分析与工程保险的承保条件评价中使用了量化的方...     

Genetic Testing,Insurance Economics,and Societal Responsibility

Three major perspectives emerge when the discussion of the implications of genetic testing on the insurance industry commences. One viewpoint, strongly advocated by certain consumer groups and ethicists on the basis of societal responsibility, categorically denies any necessity for connecting the results of genetic testing and issuance of insurance. By contrast, the insurance industry, upon examining the economics and dynamics of participation in voluntary insurance markets, lives in fear of a world filled with asymmetrical information (counter to the axioms for competitive markets), adverse selection (action by the insured as a result of asymmetric information to the perceived economic disadvantage of the insurer), and ultimately even the possibility of potential market failure or insurance company insolvency. An actuarial perspective considering the benefits (to the insurer) of this new genetic information concentrates primarily on the possibility of developing improved quantitative assessments of risk and better calculations of the actuarial present value of future loss costs based on the new statistically significant information gained from genetic testing. The strengths and weaknesses and facts and fallacies of each of these perspectives are examined in this paper, and potential solutions to the ultimate role of genetic testing in insurance underwriting and rate making are considered from the perspectives of the major players in this debate.