The insurance industry as a complex social system: Competition, cycles and crises

Abstract

Insurance is critical to the fabric of modern societies and economies, but the insurance industry continues to suffer deep cycles and periodic crises. These have a great socio-economic cost as insurance cover can become prohibitively expensive or unavailable, damaging livelihoods, property, belongings and employment. These phenomena are poorly understood. A set of socio-anthropological and behavioural hypotheses have recently been posited. We investigate these explanations by means of an agent-based simulation model. The model is parameterized on actual property insurance industry data and is carefully validated. Our main result is that simple behaviour and interaction at the individual level can result in complex cyclical industry-wide behaviour. Heterogeneity and interaction at a micro level must therefore be understood if cycles and crises in the insurance industry are to be managed and prevented.