VOLATILITY OR CYCLICALITY: THE POLISH NON-LIFE INSURANCE MARKET

Abstract

The underwriting cycle is defined as alternating periods of hard markets in which insurance prices and insurer profitability are high and soft markets with low insurance prices and low insurer profitability. Most of the research confirming the existence of cycles relies on the time series behavior of published underwriting information on loss ratios and underwriting profits. In the insurance literature it is suggested that individual insurance markets (national, products markets) are subject to cyclicality. The purpose of this research is to rigorously investigate cyclicality of the Polish insurance market and assess its volatility formally. If a cycle is found, we also investigate the cycle length. We analyzed loss ratio data for the period 1991-2011 (i.e. after the economic transformation) for non-life insurance market in Poland: aggregated and disaggregated into 18 insurance classes. A second-order autoregressive model proposed by Venezian (1985) is used to obtain the parameters for testing for the existence of the underwriting cycle. The coefficient of variation (CV) and year to year changes in loss ratios are used to assess volatility.