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Capacity Constraints and Cycles in Property-Casualty Insurance Markets

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Author Info
Anne Gron
Abstract

Underwriting cycles are unexpected in a structurally competitive industry where financial capital is the major determinant of output capacity. "Arbitrage" theories explain underwriting cycles as largely an artifact of institutional lags and reporting practices; "capacity-constraint" theories view insurance markets as characterized by real frictions that cause underwriting cycles by temporarily reducing the industry's capacity to insure risks. Arbitrage theories imply no systematic relationship between capacity and underwriting margins, while capacity-constraint hypotheses predict a negative relationship. This article provides a test of the two theories by examining the empirical relationship between capacity and underwriting margins. The results, using data on four insurance lines, generally support the capacity-constraint hypothesis; unanticipated decreases in capacity cause higher profitability and prices.

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Publisher Info
Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 25 (1994)
Issue (Month): 1 (Spring)
Pages: 110-127
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Handle: RePEc:rje:randje:v:25:y:1994:i:spring:p:110-127

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  1. M. Martin Boyer & Jörg Schiller, 2003. "Merging Automobile Insurance Regulatory Bodies: The Case of Atlantic Canada," CIRANO Working Papers 2003s-70, CIRANO. [Downloadable!]
  2. J. David Cummins & Christopher M. Lewis, 2002. "Catastrophic Events, Parameter Uncertainty and the Breakdown of Implicit Long-term Contracting in the Insurance Market: The Case of Terrorism Insurance," Center for Financial Institutions Working Papers 02-40, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
  3. Kenneth A. Froot, 2003. "Risk Management, Capital Budgeting and Capital Structure Policy for Insurers and Reinsurers," NBER Working Papers 10184, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Kenneth A. Froot & Paul G. J. O'Connell, 1997. "The Pricing of U.S. Catastrophe Reinsurance," NBER Working Papers 6043, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Anne Gron & Deborah Lucas, 1995. "External Financing and Insurance Cycles," NBER Working Papers 5229, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Kenneth A. Froot, 1999. "The Market for Catastrophe Risk: A Clinical Examination," NBER Working Papers 7286, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. 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 96-09, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
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