Insurance Cycles: Interest Rates and the Capacity Constraint Model

JOURNAL OF BUSINESS, Vol 68 No 3, July 1995

Posted: 10 Oct 1998

See all articles by Neil A. Doherty

Neil A. Doherty

University of Pennsylvania - Insurance & Risk Management Department; University of Pennsylvania - Business & Public Policy Department

James R. Garven

Baylor University - Department of Finance, Insurance & Real Estate

Abstract

Insurance profits exhibit cyclical behavior that has been attributed to capital market constraints. We show that changes in interest rates simultaneously affect the insurer's capital structure and the equilibrium underwriting profit. Depending upon asset and liability maturity structure, capital market access, and reinsurance availability, insurers will be differently affected by changing interest rates. We find that the average market response to changing interest rates roughly tracks market clearing prices. These "cyclical" effects are enhanced for firms with mismatched assets and liabilities and more costly access to new capital and reinsurance. This evidence supports the capacity constraint hypothesis.

JEL Classification: G22

Suggested Citation

Doherty, Neil A. and Garven, James R., Insurance Cycles: Interest Rates and the Capacity Constraint Model. JOURNAL OF BUSINESS, Vol 68 No 3, July 1995. Available at SSRN: https://ssrn.com/abstract=6467

Neil A. Doherty (Contact Author)

University of Pennsylvania - Insurance & Risk Management Department ( email )

Philadelphia, PA 19104-6365
United States
215-898-7652 (Phone)
215-898-0310 (Fax)

University of Pennsylvania - Business & Public Policy Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6372
United States

James R. Garven

Baylor University - Department of Finance, Insurance & Real Estate ( email )

One Bear Place #98004
Baylor University
Waco, TX 76798-8004
United States

HOME PAGE: http://business.baylor.edu/directory/?id=James_Garven

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