Are Underwriting Cycles Real and Forecastable?

21 Pages Posted: 22 Nov 2012

See all articles by M. Martin Boyer

M. Martin Boyer

HEC Montreal - Department of Finance

Eric Jacquier

Boston University School of Management; HEC Montreal - Department of Finance

Simon van Norden

HEC Montreal - Department of Finance; CIRANO; University of Montreal - Center for Interuniversity Research in Econometrics

Date Written: December 2012

Abstract

Speculative efficiency often requires that future changes in a series cannot be forecast. In contrast, series with a cyclical component would seem to be forecastable with decreases, possibly relative to a trend, during the upper part of the cycle and increases during the lower part. On the basis of autoregressive model (AR) estimates, it is considered that there is strong evidence of cycles in insurance underwriting performance as measured by the premium‐to‐loss ratio. Indeed, a large literature attempts to explain this documented cyclicality. First, we show that the parameter estimates from AR models do not lead to any such inference and that in the contrary, the evidence in the data is consistent with no cyclicality at all. Second, we show that a number of different filters lead to the same conclusion: that there is no evidence of in‐sample or out‐of‐sample predictability in annual insurance underwriting performance in the United States.

Suggested Citation

Boyer, M. Martin and Jacquier, Eric and van Norden, Simon, Are Underwriting Cycles Real and Forecastable? (December 2012). Journal of Risk and Insurance, Vol. 79, Issue 4, pp. 995-1015, 2012, Available at SSRN: https://ssrn.com/abstract=2179379 or http://dx.doi.org/10.1111/j.1539-6975.2011.01458.x

M. Martin Boyer

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

Eric Jacquier

Boston University School of Management ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, QC H3T 2A7
Canada

Simon Van Norden

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-6781 (Phone)
514-340-5632 (Fax)

HOME PAGE: http://svannorden.org

CIRANO ( email )

2020 rue University, 25th floor
Montreal H3C 3J7, Quebec
Canada

HOME PAGE: http://svannorden.org

University of Montreal - Center for Interuniversity Research in Econometrics ( email )

C.P. 6128, Succursale Centre-ville
Montreal, Quebec H3C 3J7
Canada

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