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Return attribution analysis of the UK insurance portfolios

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  • G. Christodoulakis

    ()

  • E. Mamatzakis

    ()

Abstract

We examine the attribution of premium growth rates for the five main insurance sectors of the United Kingdom for the period 1969-2005; in particular, Property, Motor, Pecuniary, Health & Accident, and Liability. In each sector, the growth rates of aggregate insurance premiums are viewed as portfolio returns which we attribute to a number of factors such as realized and expected losses and expenses, their uncertainty and market power, using the Sharpe (1988, 1992) Style Analysis. Our estimation method differs from the standard least squares practice which does not provide confidence intervals for style betas and adopts a Bayesian approach, resulting in a robust estimate of the entire empirical distribution of each beta coefficients for the full sample. We also perform a rolling analysis of robust estimation for a window of seven overlapping samples. Our empirical findings show that there are some main differences across industries as far as the weights attributed to the underlying factors. Rolling regressions assist us to identify the variability of these weights over time, but also across industries.

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File URL: http://hdl.handle.net/10.1007/s10436-009-0129-7
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Bibliographic Info

Article provided by Springer in its journal Annals of Finance.

Volume (Year): 6 (2010)
Issue (Month): 3 (July)
Pages: 405-420

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Handle: RePEc:kap:annfin:v:6:y:2010:i:3:p:405-420

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Web page: http://www.springerlink.com/link.asp?id=112370

Related research

Keywords: Insurance premiums; Monte Carlo integration; Non-negativity constraints; Return attribution; Sharpe style analysis; C1; C3; C5; E3; G2; G22;

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  1. Hall, Anthony D. & Hwang, Soosung & Satchell, Stephen E., 2002. "Using Bayesian variable selection methods to choose style factors in global stock return models," Journal of Banking & Finance, Elsevier, vol. 26(12), pages 2301-2325.
  2. Soosung Hwang & Stephen E. Satchell, 2007. "The disappearance of style in the US equity market," Applied Financial Economics, Taylor & Francis Journals, vol. 17(8), pages 597-613.
  3. Richard D. Phillips & J. David Cummins & Franklin Allen, 1996. "Financial Pricing of Insurance in the Multiple Line Insurance Company," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 96-09, Wharton School Center for Financial Institutions, University of Pennsylvania.
  4. J. David Cummins, 2000. "Allocation of Capital in the Insurance Industry," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 3(1), pages 7-27, 03.
  5. Kloek, Tuen & van Dijk, Herman K, 1978. "Bayesian Estimates of Equation System Parameters: An Application of Integration by Monte Carlo," Econometrica, Econometric Society, Econometric Society, vol. 46(1), pages 1-19, January.
  6. Winter Ralph A., 1994. "The Dynamics of Competitive Insurance Markets," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 3(4), pages 379-415, September.
  7. Kim, Tae-Hwan & White, Halbert & Stone, Douglas, 2000. "Asymptotic and Bayesian Confidence Intervals for Sharpe Style Weights," University of California at San Diego, Economics Working Paper Series qt5h98h28m, Department of Economics, UC San Diego.
  8. Harrington, Scott E & Danzon, Patricia M, 1994. "Price Cutting in Liability Insurance Markets," The Journal of Business, University of Chicago Press, vol. 67(4), pages 511-38, October.
  9. Anthony D. Hall & S. Hwang & Steve Satchell, 2000. "Using Bayesian Variable Selection Methods to Choose Style Factors in Global Stock Return," Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney 31, Quantitative Finance Research Centre, University of Technology, Sydney.
  10. Geweke, John, 1986. "Exact Inference in the Inequality Constrained Normal Linear Regression Model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 1(2), pages 127-41, April.
  11. Emmanouel Mamatzakis & Christos Staikouras, 2006. "A micro-econometric model of the UK property-liability insurance industry," Applied Financial Economics Letters, Taylor and Francis Journals, Taylor and Francis Journals, vol. 2(4), pages 257-260, July.
  12. Cummins, J. David & Danzon, Patricia M., 1997. "Price, Financial Quality, and Capital Flows in Insurance Markets," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 6(1), pages 3-38, January.
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