Underwriting Apophenia and Cryptids: Are Cycles Statistical Figments of our Imagination?
The Lloyd's 2007 Survey of Underwriters states that "for the third year running, managing the cycle emerged as the most important challenge for the industry, by some margin"". The contention is of course that underwriting cycles exist in property and casualty insurance and are economically significant. Using a meta-analysis of published papers in the area of insurance economics, I show that the evidence in favor of underwriting cycles is misleading or even completely absent. There is in fact no statisical or economic support for the existence of underwriting cycles. This means that firm profitability in the property and casualty insurance industry is not cyclical; we only observe profitability going up or down with no meaningful pattern. It consequently follows that pricing in the property and casualty insurance industry is not incompatible with that of a competitive market."
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