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The Underwriting Cycle

Master's Thesis
Corporate Partner: 
US Insurance Company
Date Published: 
October 16, 2015

The subject of this thesis is the underwriting cycle—that is, the yearly change in collected premiums of an insurance company in the US property/casualty insurance industry depicted as a time series. This series exhibits an almost regular cyclical path over time on variable, company, and industry levels. In contrast to previous research, this thesis takes a interdisciplinary approach by unifying industrial, actuarial, and academic research. After introducing the data collected and defining the data sets under consideration, the results of the variables of those data sets are compared to US property/casualty insurance industry reports. The basic insurance-relevant variables are analyzed and investigated with regard to their influence on the underwriting cycles of the respective insurance companies. Since this first analysis will have very little explanatory power, other approaches will need to be taken into consideration. Using prospect theory, we analyze the relationship between brokers and insurance companies. The underlying hypothesis of the first part is that the commission and contingent commission payments between insurance and broker companies have a significant influence on the underwriting cycle. This turns out to be true for all companies, though for some more than others. The second part gives a basic introduction to the possible influences of reserve management on the underwriting cycle. The second part starts with an introduction to actuarial research, followed by a detailed introduction to a new insurance model. This model investigates transitions between hard and soft markets, using reserve management decisions as trigger. The difference of this particular model to the other models—models which will be mentioned in the literature review—is that the interactions of the various insurance company components are depicted with respect to reserving behavior.