Business cycles in insurance and reinsurance: international diversification effects

• Autores: Ursina B. Meier, François Outreville
• Localización: Applied financial economics, ISSN 0960-3107, Vol. 20, Nº. 7-9, 2010, págs. 659-668
• Idioma: inglés
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• Resumen

  • This article examines the existence of a cyclical pattern in property-liability insurance for the US over the recent period 1982 to 2001 in connection with the international price of reinsurance during the same period. The fluctuations in the price of reinsurance during the past 20 years have been documented recently in the business literature. If the price of reinsurance decreases, reinsurance becomes more affordable for insurance companies and this will be reflected in more capacity, price competition and finally an increase in the loss and combined ratio. Our study is using a price index developed recently for this period of time and based on Swiss Re's global book of business. We show that the reinsurance price index exhibits a significant cycle of almost nine years. The beginning of our observation period starting in 1982 coincides with previously found structural breaks in the Loss Ratio (LR) series. We find that inclusions of the reinsurance price and/or the Money Market (MM) rate do not contribute much to the explanation of the LR in property-liability insurance, whereas the LR does help to explain the fluctuations in the reinsurance price index. This supports our hypothesis of the international diversification effects of reinsurance operation and a proliferation of cycles or large insurance shocks through international reinsurance services.