Underwriting Apophenia and Cryptids: Are Cycles Statistical Figments of our Imagination?

Reproduction partielle permise avec citation du document source, incluant la notice ©. Short sections may be quoted without explicit permission, if full credit, including © notice, is given to the source. Le CIRANO collabore avec de nombreux centres et chaires de recherche universitaires dont on peut consulter la liste sur son site web. Les cahiers de la série scientifique (CS) visent à rendre accessibles des résultats de recherche effectuée au CIRANO afin de susciter échanges et commentaires. Ces cahiers sont écrits dans le style des publications scientifiques. Les idées et les opinions émises sont sous l'unique responsabilité des auteurs et ne représentent pas nécessairement les positions du CIRANO ou de ses partenaires. This paper presents research carried out at CIRANO and aims at encouraging discussion and comment. The observations and viewpoints expressed are the sole responsibility of the authors. They do not necessarily represent positions of CIRANO or its partners. Résumé/Abstract The Lloyd's 2007 Survey of Underwriters states that "for the third year running, managing the cycle emerged as the most important challenge for the industry, by some margin". The contention is of course that underwriting cycles exist in property and casualty insurance and are economically significant. Using a meta-analysis of published papers in the area of insurance economics, I show that the evidence in favor of underwriting cycles is misleading or even completely absent. There is in fact no statisical or economic support for the existence of underwriting cycles. This means that firm profitability in the property and casualty insurance industry is not cyclical; we only observe profitability going up or down with no meaningful pattern. It consequently follows that pricing in the property and casualty insurance industry is not incompatible with that of a competitive market. Powers for comments on an earlier draft, as well as to Tolga Cenesizoglu for continuing discussions. I would also like to thank conference participants at the Munich Behavioral Insurance Seminar for listening to a previous iteration of this research project, and to 2012 EGRIE participants in Palma – and especially Richard Peter-for very stimulating discussions.