Interest Rates and Cyclical Underwriting Profits in the Property-Liability Insurance Industry: An Equilibrium Approach

Underwriting profits in the property-liability insurance industry have been cyclical for many decades. The insurance industry refers to this behavior as the underwriting profit cycle. This study explains the cycle within the framework of both the insurance and capital markets, using an equilibrium approach. Thus, it seeks to explain the cycle by determining underwriting profits jointly from both insurance and capital market conditions. Demand and supply functions of insurance are developed to determine the equilibrium underwriting profitability. The demand for insurance is hypothesized to increase (decrease) if the expected rate of return is more (less) than the equilibrium rate of return on underwriting which is determined by the capital asset pricing model. The derived supply from the capital asset pricing model is shown to be a positive function of the riskfree interest rate adjusted by the fund-generating coefficient.

Name thesis:degree_name

Ph.D.

Level thesis:degree_level

Dissertation

Discipline thesis:degree_discipline

Finance

Grantor

University of Illinois at Urbana-Champaign

Year dc:date

2014

Author dc:creator

• Kang, Han Bin

• Economics, Finance

Identifier

(UMI)AAI8422094

OAI identifier oai:identifier

oai:www.ideals.illinois.edu:2142/71514