Do Underwriting Cycles Affect Property Casualty Insurer Asset Allocation? Stocks Versus Mutuals
Published in Journal of Insurance Regulation, 2011, 30:5-27
31 Pages Posted: 26 Apr 2007 Last revised: 10 Jan 2019
Date Written: April 25, 2007
This study performs a time series analysis to explore the effects of property casualty insurance underwriting cycles on stock and mutual insurers' asset risk taking. It is well documented that underwriting costs and insolvency risks faced by insurers are greater in hard markets while lower in soft markets. To achieve optimal risk portfolios, insurers may take on more asset risks in soft markets and discharge them in hard markets. Moreover, we expect stock companies would be more reactive to underwriting cycles than are mutual companies given greater risk-taking capacity and better managerial-incentive-control mechanism of the stock companies. Our result confirms these conjectures. While stock companies are found actively responding to the underwriting cycle, mutual companies appear to be indolent. Another interesting finding is that property casualty insurers, both mutual and stock companies, do not actively respond to capital market signals.
Keywords: underwriting cycles; asset allocation; ownership; insurance
JEL Classification: g11,g22
Suggested Citation: Suggested Citation