Do Underwriting Cycles Matter? An Analysis Based on Dynamic Financial Analysis
By Martin Eling, Sebastian D. Marek
The aim of this paper is to analyze the impact of underwriting cycles on the risk and return of non-life insurance companies. We integrate underwriting cycles in a dynamic financial analysis framework using a stochastic process, specifically, the Ornstein-Uhlenbeck process, which is fitted to empirical data and used to analyze the impact of these cycles on risk and return. We find that underwriting cycles have a substantial influence on risk and return measures. Our results have implications for managers, regulators, and rating agencies that use such models in risk management, e.g., to determine risk-based capital requirements.
KEYWORDS: Non-life insurance, dynamic financial analysis, underwriting cycles, Ornstein-Uhlenbeck process, copulas