Insurance cycles: interest rates and the capacity constraint model

Article Abstract:

The cyclical behavior of insurance earnings has been ascribed to capital market constraints. There are three competing models that attempt to explain the insurance cycle: the feedback/lag models, the interest rate model and the capacity constrained models. The first predict that insurance prices are correlated, the second predicts that prices reflect expected payouts capitalized at the current cost of capital, while the third adopts a present value concept of insurance prices. A study is conducted to demonstrate that interest rate changes have simultaneous effects on the insurance company's capital structure and equilibrium underwriting profit. It is shown that the average insurance market response to changing interest rates mirrors market clearing prices. The underwriting cycle is found to be more pronounced for insurers with mismatched assets and liabilities and those that have made costly leverage adjustments.

Insurance, Insurance Carriers and Related Activities, INSURANCE CARRIERS

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Business cycles for G7 and European countries

Article Abstract:

Research on business cycles among the Group of Seven countries was conducted due to the occurrence of recessions in the past 20 years. Empirical evidence show the asymmetric characteristic of business cycles with industrial output slowly rising in expansion while rapidly declining in contractions. Results suggest that business cycles are influenced by external factors and transcend state boundaries. US and Canada exhibit strong associations with each other as well as a European group composed of Germany, France, Italy, Belgium, Netherlands and Ireland.

Economic aspects, Group of 7

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Adverse selection, private information, and lowballing in insurance markets

Article Abstract:

A study of automobile insurance data indicates that loss ratios for associates of policyholders decrease with policy age, which is consistent with a pattern of price lowballing. Accordingly, market share shifts to direct policy writers from independent-agent companies since independent-agent companies are not able to capitalize on private information because their system constitutes a secondary market for this information, and because direct writers prevent their agents from selling private information to competitors.

Independent insurance agents

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