An International Analysis of Underwriting Cycles in Property-Liability Insurance

Abstract

Most prior analyses of underwriting cycles have explained cycles as a supply-side phenomenon involving irrational behavior on the part of insurers. This paper proposes instead that insurance prices are set according to rational expectations. Although rational expectations per se would be inconsistent with an underwriting cycle, the authors hypothesize that cycles are “created” in an otherwise rational market through the intervention of institutional, regulatory, and accounting factors. Empirical evidence is presented indicating that underwriting profits in several industrialized nations are consistent with the hypothesis.