U.S. Property-Casualty: Underwriting Cycle Modeling and Risk Benchmarks
By Shaun S. Wang, John A. Major, Hucheng (Charles) Pan, Weng Kah Leong
The risk benchmarks and underwriting cycle models presented here can be used by insurers in their enterprise risk management models. We analyze the historical underwriting cycle and develop a regime-switching model for simulating future cycles, and show its superiority to an utoregressive approach. We compute benchmarks for pricing and reserving risks by line of business and by industry segments (large national, super regional, and small regional). We also compute the historical correlation of the loss ratio, as well as the correlation of changes in the reserve estimate between lines of business.
Keywords: Underwriting cycle, regime-shifting, benchmark, pricing risk, reserving risk, correlation, enterprise risk management