Empirical Analysis On The Underwriting Cycle And Its Causes Of China's Non-life Insurance

One problem confronted with the development of China's non-Life insurance industry is its low underwriting margin rate for years, which caused a series of consequences, including as follows:(1) reducing the investment and limiting the necessary capital which undermined the long-term growth of the industry;(2) degrading the underwriting capacity and repayment capability. The underwriting margin is one important direct object of the research on underwriting cycle.The phenomenon of underwriting cycle was first observed in the non-Life insurance of the US, which exhibits a cyclical pattern of three consecutive years of loss after three consecutive years of gain in underwriting margin. Later researches showed the underwriting cycle is a universal phenomenon observed in most other countries throughout the world, which was found closely relevant with the economic globalization and global reinsurance market. Naturally, researchers started to explore the reasons that underwriting formed.Researches have showed that the underwriting cycle formed in different countries with different traits and reasons, though it was found in various insurance markets. In order to explain the mechanism of the formation of underwriting cycle, various researchers have proposed several different hypotheses and proved their rationality through empirical analyses, with some important hypotheses as below:(1) Irrational expectation hypothesis;(2) Rational expectation/Institute shock hypothesis;(3) Underwriting capacity constraint hypothesis;(4) General economic cycle hypothesis. Irrational expectation hypothesis views the market is rational, and "Naive Pricing Method", irrational competence and cash-flow underwriting are main reasons of underwriting cycle. Conversely, rational expectation/institute shock hypothesis views the market is rational, and that underwriting cycle formed because of institute shocks, such as data collection, policy renewal and market regulation. Underwriting capacity constraint hypothesis analyzes from the industry's underwriting capacity and overall capital, while general economic hypothesis mainly study the influences of economic factors on the underwriting cycle, such as GDP, interest rate and inflation rate.This study explores whether the phenomenon of the underwriting cycle exist in China's non-Life insurance and its several lines. Furthermore, it studies the causality of the underwriting cycle in China's non-Life insurance. The main methods of this paper could be generalized as follows:we first expand the typical AR(2) model to a multi-variances model and study whether there exists in China's non-Life insurance; we then modify the GLS model raised by Lamm-Tennant and Weiss in1997with several variances, with which demonstrate characteristic traits of China's non-Life insurance, and study what factors influence the underwriting cycle most.We have following conclusions:(1) With typical AR(2) model, we find that China's Auto insurance includes a cycle of about5.8years, and we first observe there are signs of underwriting cycle in personal accident insurance, but not very significant. We also find that China's enterprise property insurance does not have underwriting cycle;(2) With the modified AR(2) model, we observe an underwriting cycle of4.68-8.44years in China's non-Life insurance;(3) Irrational expectation/institute shock hypothesis have strong capability of explaining the causality of the cycle, with very important reasons like data collection lag, policy renewal lab, market regulation and premium approval;(4) General economic cycle hypothesis can effectively explain the underwriting cycle too. What's more, China's non-Life insurance shows obvious procyclicality to the economic cycle;(5) The development of China's non-Life insurance industry was constrained by lack of net capital, which validated the explanative ability to the existence of underwriting cycle;(6) Even though irrational expectation hypothesis is not very strong when explaining the cycle,"Naive pricing" may still exist and market competence could be of great influence.In order to maintain the long-term, steady and healthy growth of China's non-Life insurance, this study suggests that the insurance industry and the regulating authority should continue the marketization of the insurance market, enforce more market competence, reduce institutional constraints, and improve the capital levels of the industry to upgrade the underwriting capacity. Besides, we should take more careful and flexible measures in order to put counter-economic cycle and counter-underwriting cycle management and regulation into practice.