Skip to main content
SpringerLink
Log in

Volatility and Underwriting Cycles

  • Chapter
Handbook of Insurance

Abstract

This paper describes and illustrates the main ideas and findings of research on the volatility and cyclical behavior of insurance prices relative to those predicted by a perfectly competitive market in long-run equilibrium. After presenting evidence that insurance market prices indeed follow a second order autoregressive process, we examine several lines of research that have tried to explain the cyclical behavior of insurance prices. Particular emphasis is given to the theoretical developments of and empirical results supporting capital shock models, which primarily explain periods of high insurance prices. We then summarize the idea that moral hazard and/or winners curse effects can explain periods of low insurance prices. Finally, the potential effects of regulation on insurance price volatility are summarized.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution
Chapter
USD 29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD 149.00
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
Softcover Book
USD 199.99
Price excludes VAT (USA)
  • Compact, lightweight edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  • Abraham, Kenneth S. (1988). “The Causes of the Insurance Crisis,” in Walter Olson, ed., New Directions in Liability Law, New York: The Academy of Political Science.

    Google Scholar 

  • Angbazo, Lazarus A. and Ranga Narayaran (1996). “Catastrophic Shocks in the Property-Liability Insurance Industry: Evidence on Regulatory and Contagion Effects,” Journal of Risk and Insurance 63, 619–637.

    Article  Google Scholar 

  • Angoff, Jay (1988). “Insurance Against Competition: How the McCarran-Ferguson Act Raises Prices and Profits in the Property-Casualty Insurance Industry,” Yale Journal on Regulation 5, 397–415.

    Google Scholar 

  • Ayres, Ian and Peter Siegelman (1989). “The Economics of the Insurance Antitrust Suits: Toward and Exclu-sionary Theory,” Tulane Law Review 63, 971–997.

    Google Scholar 

  • Bagwell, Laurie and John Shoven (1989). “Cash Distributions to Shareholders,” Journal of Economic Perspectives 3, 129–141.

    Article  Google Scholar 

  • Berger, Lawrence A. (1988). “A Model Of The Underwriting Cycle In The Property/Liability Insurance Industry,” Journal Of Risk and Insurance 50, 298–306.

    Google Scholar 

  • Berger, Larry A., Cummins, J. David and Tennyson, Sharon (1992). “Reinsurance and The Liability Insurance Crisis,” Journal Of Risk and Uncertainty 5, 253–272.

    Article  Google Scholar 

  • Bradford, David F. and Kyle D. Logue (1996). “The Effects of Tax-Law Changes on Prices in the Property-Casualty Insurance Industry” Working paper 5652, National Bureau of Economic Research, Inc.

    Google Scholar 

  • Cagle, Julie (1993). “Premium Volatility in Liability Insurance Markets,” unpublished doctoral disserta-tion, University of South Carolina.

    Google Scholar 

  • Cagle, Julie and Scott Harrington (1995). “Insurance Supply with Capacity Constraints and Endogenous Insolvency Risk,” Journal of Risk and Uncertainty 11, 219–232.

    Article  Google Scholar 

  • Cassidy, Steven M., Donald W. Hardigree and Arthur M.B. Hogan (1996). “Underwriting Cycles in Health Insurance,” Journal of Insurance Regulation 14, 504–514.

    Google Scholar 

  • Chen, Renbao, Kie A. Wong and Hong C. Lee (1999). “Underwriting Cycles in Asia,” Journal of Risk and Insurance 66, 29–47.

    Article  Google Scholar 

  • Choi, Seungmook and Paul Thistle (1997). “A Structural Approach to Underwriting Cycles in the Property-Liability Insurance Industry,” working paper, Western Michigan University.

    Google Scholar 

  • Clarke, Richard N., Warren-Boulton, Frederick, Smith, David K. and Simon, Marilyn J. (1988). “Sources Of The Crisis In Liability Insurance: An Empirical Analysis,” Yale Journal On Regulation 5, 367–395.

    Google Scholar 

  • Cummins, J. David and Danzon, Patricia M. (1997). “Price, Financial Quality, and Capital Flows in Insur-ance Markets,” Journal of Financial Intermediation 6, 3–38.

    Article  Google Scholar 

  • Cummins, J. David and Francois Outreville (1987). “An International Analysis Of Underwriting Cycles In Property-Liability Insurance,” Journal Of Risk and Insurance 54, 246–262.

    Article  Google Scholar 

  • Cummins, J. David and James B. McDonald (1991). “Risk Probability Distributions and Liability Insurance Pricing,” in J. David Cummins, J. David, Scott Harrington and Robert Klein, eds., Cycles and Crises in Property/Casualty Insurance: Causes and Implications for Public Policy, Kansas City, Mo.: NAIC, 1991.

    Google Scholar 

  • Cummins, J. David and Richard A. Phillips (2000). “Applications of Financial Pricing Models in Property-Liability Insurance,” in this book.

    Google Scholar 

  • Cummins, J. David and Scott Harrington (1985). “Property-Liability Insurance Rate Regulation: Estima-tion of Underwriting Betas Using Quarterly Profit Data,” Journal of Risk and Insurance 52, 16–43.

    Article  Google Scholar 

  • Cummins, J. David, Scott Harrington and Robert Klein, eds. (1991). Cycles and Crises in Property/Casu-alty Insurance: Causes and Implications for Public Policy, Kansas City, Mo.: NAIC, 1991.

    Google Scholar 

  • Cummins, J. David and Sharon Tennyson (1992). “Controlling Automobile Insurance Costs,” Journal of Economic Perspectives 6, 95–115.

    Article  Google Scholar 

  • Danzon, Patricia (1983). “Rating Bureaus In U.S. Property-Liability Insurance Markets: Anti Or Pro-Competitive?” Geneva Papers On Risk and Insurance 8, 371–402.

    Google Scholar 

  • Danzon, Patricia (1985). Medical Malpractice: Theory, Evidence and Public Policy. Cambridge, Mass: Harvard University Press.

    Google Scholar 

  • Doherty, Neil A. and Georges Dionne (1993). “Insurance with Undiversifiable Risk: Contract Structure and Organizational Form of Insurance Firms,” Journal of Risk and Uncertainty 6, 187–203.

    Article  Google Scholar 

  • Doherty, Neil and James Garven (1986). “Price Regulation In Property-Liability Insurance: A Contingent Claims Analysis,” Journal Of Finance 41, 1031–1050.

    Article  Google Scholar 

  • Doherty, Neil A. and James Garven (1995). “Insurance Cycles: Interest Rates and the Capacity Constraint Model,” Journal of Business 68, 383–404.

    Article  Google Scholar 

  • Doherty, Neil and Han Bin Kang (1988). “Price Instability For A Financial Intermediary: Interest Rates and Insurance Price Cycles,” Journal of Banking and Finance 12, 199–214.

    Article  Google Scholar 

  • Doherty, Neil A. and Lisa Posey (1993). “Asymmetric Information and Availability Crises in Insurance Markets: Theory and Evidence,” working paper, University of Pennsylvania.

    Google Scholar 

  • Ellis, Peter M. (1988). “The Aggregate Expense Ratio Limit in the Domestic Property-Casualty Industry, Department of Business Administration,” Utah State University.

    Google Scholar 

  • Enders, Walter (1995). Applied Time Series Econometrics, New York: John Wiley and Sons.

    Google Scholar 

  • Ferson, Wayne E. and Campbell, Harvey R. (1991). “The Variation Of Economic Risk Premiums,” Journal Of Political Economy 99, 385–415.

    Article  Google Scholar 

  • Fields, Joseph and Emilio Venezian (1989). “Profit Cycles In Property-Liability Insurance: A Disaggregated Approach,” Journal of Risk and Insurance 56, 312–319.

    Article  Google Scholar 

  • Finsinger, Jorg and Pauly, Mark V. (1984). “Reserve Levels and Reserve Requirements For Profit Maximizing Insurance Firms.” In G. Bamberg and K. Spremann eds., Risk and Capital, Berlin: Springer-Verlag; reprinted in J. David Cummins and Scott E. Harrington, Fair Rate of Return in Property-Liability Insurance, Boston: Kluwer, 1986.

    Google Scholar 

  • Froot, Kenneth, David Scharfstein and Jeremy Stein (1993). “Risk Management: Coordinating Corporate Investment and Financing Policies,” Journal of Finance 48, 1629–1658.

    Google Scholar 

  • Froot, Kenneth and Jeremy Stein (1998). “Risk Management, Capital Budgeting, and Capital Structure Policy for Financial Institutions: An Integrated Approach,” Journal ofFinancial Economics 47, 55–82.

    Article  Google Scholar 

  • Froot, Kenneth and Paul O’Connell (1997). “The Pricing of U.S. Catastrophe Reinsurance,” working paper 6043, National Bureau of Economic Research.

    Google Scholar 

  • Fung, Hung-Gay, Gene Lai, Gary A. Patterson and Robert C. Witt (1998). “Underwriting Cycles in Property-Liability Insurance: An Empirical Analysis of Industry and By-Line Data,” Journal of Risk and Insurance 65, 539–562.

    Article  Google Scholar 

  • Goldstein, Robert, Nengjiu Ju and Hayne Leland (1998). “Endogenous Bankruptcy, Endogenous Restructuring and Dynamic Capital Structure,” working paper, Fisher College of Business, Ohio State University.

    Google Scholar 

  • Greenwald, Bruce and Joseph Stiglitz (1993). “Financial Market Imperfections and Business Cycles,” Quarterly Journal of Economics 108, 77–114.

    Article  Google Scholar 

  • Grace, Martin and Julie Hothkiss (1994a). “External Impacts on the Property-Liability Insurance Cycle,” Journal of Risk and Insurance 62, 738–754.

    Google Scholar 

  • Gron, Anne (1994a). “Evidence of Capacity Constraints in Insurance Markets,” Journal of Law and Economics 37, 349–377.

    Article  Google Scholar 

  • Gron, Anne (1994b). “Capacity Constraints and Cycles in Property-Casualty Insurance Markets,” RAND Journal of Economics 25, 110–127.

    Article  Google Scholar 

  • Gron, Anne (1995). “Collusion, Costs or Capacity? Evaluating Theories of Insurance Cycles,” working paper, Northwestern University.

    Google Scholar 

  • Gron, Anne and Deborah Lucas (1995). “External Financing and Insurance Cycles,” working paper, Northwestern University.

    Google Scholar 

  • Haley, Joseph (1993). “A Cointegration Analysis of the Relationship Between Underwriting Margins and Interest Rates: 1930–1989,” Journal of Risk and Insurance 60, 480–493.

    Article  Google Scholar 

  • Haley, Joseph (1995). “A By-Line Cointegration Analysis of Underwriting Margins and Interest Rates in the Property-Liability Insurance Industry,” Journal of Risk and Insurance 62, 755–763.

    Article  Google Scholar 

  • Harrington, Scott E. (1984). “The Impact of Rate Regulation on Prices and Underwriting Results in the Property-Liability Insurance Industry: A Survey,” Journal of Risk and Insurance 51, 577–623.

    Article  Google Scholar 

  • Harrington, Scott E. (1988). “Prices and Profits in The Liability Insurance Market,” in Robert Litan and Clifford Winston, eds., Liability: Perspectives and Policy, Washington, D.C.: The Brookings Institution.

    Google Scholar 

  • Harrington, Scott E. (1989). “Fact vs. Fiction On Advisory Rates,” Best’s Review, Property-Liability 90, 56–60, 119.

    Google Scholar 

  • Harrington, Scott E. (1990). “The Liability Insurance Market: Volatility in Prices and in The Availability of Coverage,” in Peter Schuck, ed., Tort Law and The Public Interest: Competition, Innovation, and Consumer Welfare, New York: W.W. Norton.

    Google Scholar 

  • Harrington, Scott E. and Robert E. Litan (1988). “Causes Of The Liability Insurance Crisis,” Science 239, 737–741.

    Article  Google Scholar 

  • Harrington, Scott E. and Greg Niehaus (1998). “Race, Redlining, and Automobile Insurance Prices,” Journal of Business, July.

    Google Scholar 

  • Harrington, Scott E. and Patricia Danzon (1994). “Price Cutting in Liability Insurance Markets,” Journal of Business 67, 511–538.

    Article  Google Scholar 

  • Harrington, Scott E. and Patricia Danzon (2000). “The Economics of Liability Insurance,” in this book.

    Google Scholar 

  • Higgins, Matthew and Paul Thistle (1997). “Capacity Constraints and the Dynamics of Underwriting Profits,” working paper, Western Michigan University.

    Google Scholar 

  • Kaplan, Seven and Luigi Zingales (1997). “Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?” Quarterly Journal of Economics 112, 169–215.

    Article  Google Scholar 

  • Kumar, Praveen (1998). “Strategic Uncertainty, Learning, and Dynamic Financial and Investment Policy,” working paper, University of Houston.

    Google Scholar 

  • Lacey, Nelson (1988). “The Competitiveness of the Property-Casualty Insurance Industry: A Look at Market Equity Values and Premium Prices,” Yale Journal on Regulation 5, 501–516.

    Google Scholar 

  • Lamm-Tennant, Joan and Mary A. Weiss (1997). “International Insurance Cycles: Rational Expectations /International Intervention,” Journal of Risk and Insurance 64, 415–439.

    Article  Google Scholar 

  • Marshall, John (1976). “Insurance Theory: Reserves Versus Mutuality,” Economic Inquiry, 476–492

    Google Scholar 

  • Mauer, David C. and Alexander J. Triantis (1994). “Interactions of Corporate Financing and Investment Decisions: A Dynamic Framework,” Journal of Finance 49, 1253–1278.

    Article  Google Scholar 

  • McGee, Robert (1986). “The Cycle In Property-Casualty Insurance,” Federal Reserve Bank Of New York Quarterly Review, 22–30.

    Google Scholar 

  • Mei, Jianping and Anthony Saunders (1994). “The Time Variation of Risk Premiums on Insurer Stocks,” Journal of Risk and Insurance 61, 12–32.

    Article  Google Scholar 

  • Munch, Patricia and Dennis Smallwood (1982).“ Theory Of Solvency Regulation In The Property and Casu-alty Industry,” in Gary Fromm, ed., Studies In Public Regulation, Cambridge, Mass.: MIT Press.

    Google Scholar 

  • Myers, Stewart C. (1977). “Determinants of Corporate Borrowing,” Journal of Financial Economics 5, 147–175.

    Article  Google Scholar 

  • Myers, Stewart C. and Richard A. Cohn (1986). “A Discounted Cash Flow Approach To Property-Liability Insurance Rate Regulation,” in J. David Cummins and Scott E. Harrington, eds., Fair Rate Of Return In Property-Liability Insurance. Boston: Kluwer.

    Google Scholar 

  • Myers, Stewart C. and N. Majluf (1984). “Corporate Financing and Investment Decisions When Firms Have Information that Investors Do Not,” Journal of Financial Economics 11, 187–221.

    Article  Google Scholar 

  • Niehaus, Greg and Andy Terry (1993). “Evidence on the Time Series Properties of Insurance Premiums and Causes of the Underwriting Cycle: New Support for the Capital Market Imperfection Hypothe-sis,” Journal of Risk and Insurance 60, 466–479.

    Article  Google Scholar 

  • Outreville, Francois J. (1990). “Underwriting Cycles and Rate Regulation in Automobile Insruance Markets,” Journal of Insurance Regulation 8, 274–286.

    Google Scholar 

  • Petroni, Kathy R. (1992). “Optimistic Reporting In The Property-Casualty Insurance Industry,” Journal Of Accounting and Economics 15, 485–508.

    Article  Google Scholar 

  • Phillips, Richard D., J. David Cummins and Franklin Allen (1998). “Financial Pricing of Insurance in the Multiple-Line Insurance Company,” Journal of Risk and Insurance 65, 597–636.

    Article  Google Scholar 

  • Priest, George (1987). “The Current Insurance Crisis and Modern Tort Law,” Yale Law Journal 96, 1521–1590.

    Article  Google Scholar 

  • Shelor, Roger M., Dwight C. Anderson and Mark L. Cross (1992). “Gaining from Loss: Property-Liability Insurer Stock Returns in the Aftermath of the 1989 California Earthquake,” Journal of Risk and Insurance 5, 476–488.

    Google Scholar 

  • Smith, Michael (1989). “Investment Returns and Yields To Holders Of Insurance,” Journal Of Business 62, 81–98.

    Article  Google Scholar 

  • Sommer, David W. (1996). “The Impact of Firm Risk on Property-Liability Insurance Prices,” Journal of Risk and Insurance 63, 501–514.

    Article  Google Scholar 

  • Stewart, Barbara D. (1984). “Profit Cycles In Property-Liability Insurance,” in John D. Long, ed., Issues In Insurance, Malvern, Pa.: American Institute For Property and Liability Underwriters.

    Google Scholar 

  • Stewart, Richard E. (1987). RememberingA Stable Future: Why Flex Rating Cannot Work. New York: Insur-ance Services Office and Insurance Information Institute.

    Google Scholar 

  • Tennyson, Sharon L. (1993). “Regulatory Lag in Automobile Insurance,” Journal of Risk and Insurance 60, 36–58.

    Article  Google Scholar 

  • Tort Policy Working Group (1986). “Report of the Tort Policy Working Group on the Causes, Extent, and Policy Implications of the Current Crisis in Insurance Availability and Affordability,” Washington, D.C.: U.S. Department Of Justice.

    Google Scholar 

  • Trebilcock, Michael J. (1987). “The Insurance-Deterrence Dilemma of Modern Tort Law,” San Diego Law Review.

    Google Scholar 

  • Venezian, Emilio (1985). “Ratemaking Methods and Profit Cycles in Property and Liability Insurance,” Journal of Risk and Insurance 52, 477–500.

    Article  Google Scholar 

  • Weiss, Mary (1985). “A Multivariate Analysis of Loss Reserving Estimates in Property-Liability Insurers,” Journal Of Risk and Insurance 52, 199–221.

    Article  Google Scholar 

  • Winter, Ralph A. (1988). “The Liability Crisis and The Dynamics of Competitive Insurance Markets,” Yale Journal On Regulation 5, 455–499.

    Google Scholar 

  • Winter, Ralph A. (1991a). “The Liability Insurance Market,” Journal of Economic Perspectives 5, 15–136.

    Article  Google Scholar 

  • Winter, Ralph A. (199lb). “Solvency Regulation and the Insurance Cycle,” Economic Inquiry 29,458–471.

    Article  Google Scholar 

  • Winter, Ralph A. (1994). “The Dynamics Of Competitive Insurance Markets,” Journal Of Financial Inter-mediation 3, 379–415.

    Google Scholar 

  • Yuengert, Andrew (1991). “Excess Capacity in the Property/Casualty Industry,” working paper, Federal Reserve Bank of New York.

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. University of South Carolina, USA

    Scott E. Harrington & Greg Niehaus

Authors
  1. Scott E. Harrington
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Greg Niehaus
    View author publications

    You can also search for this author in PubMed Google Scholar

Editor information

Editors and Affiliations

  1. HEC-Montréal, Canada

    Georges Dionne (Risk Management Chair) (Risk Management Chair)

Rights and permissions

Reprints and permissions

Copyright information

© 2000 Springer Science+Business Media New York

About this chapter

Cite this chapter

Harrington, S.E., Niehaus, G. (2000). Volatility and Underwriting Cycles. In: Dionne, G. (eds) Handbook of Insurance. Huebner International Series on Risk, Insurance, and Economic Security, vol 22. Springer, Dordrecht. https://doi.org/10.1007/978-94-010-0642-2_20

Download citation

  • DOI: https://doi.org/10.1007/978-94-010-0642-2_20

  • Publisher Name: Springer, Dordrecht

  • Print ISBN: 978-0-7923-7911-9

  • Online ISBN: 978-94-010-0642-2

  • eBook Packages: Springer Book Archive

Publish with us

Policies and ethics

Search

Navigation