Interest Rates,Capacity Constraints And China Property Insurance Underwriting Cycle

Underwriting cycles is property-liability insurance underwriting profit margin or premium showing a cyclical phenomenon over time.The study of the underwriting cycles helps to understand the operating law of the insurance industry.Therefore,in recent years,the study of the underwriting cycles has drawn more and more attention from domestic scholars.Foreign studies show that the risk-free interest rate and the insurance companies’ insured capacity have a profound impact on the formation of the underwriting cycles,and the interest rate not only directly affects the underwriting cycles through the discounted process of insurance pricing,but also may change the insurers’ capital structure,thereby affecting the underwriting cycles.Many domestic literatures have analyzed the relationship between various economic factors and the underwriting cycle in property insurance industry of China,but seldom studied the impact of capacity on the underwriting cycle.And they seldom studied whether the interest rate will change the capital structure of property insurance industry of China to make the capacity change,which indirectly affect the underwriting cycles.Therefore,by combing the previous research and according to the latest data,the paper explores the relationship between interest rate,capacity and the underwriting cycle in property insurance industry of China.In this paper,the author used HP filter method to measure the existence of profit cycle in property insurance industry of China,concluded that there has 5-year underwriting cycle.Then analyzed the characteristics of the cycle,and compared with the results of GDP filtering,concluded that underwriting cycle and business cycle are consistent ostensibly.Based on the recognition of the existence of underwriting cycle,a structural vector autoregressive model is constructed with four variables: risk-free rate,inflation rate,capacity(underwriting leverage)and underwriting profit(loss ratio).Through the model itself and the corresponding orthogonal impulse response function and variance decomposition,the author studies the strength and influence mechanism of each variable on the underwriting cycle and analyzes the dynamic relationship between interest rate,capacity and underwriting profit.The empirical results show that the theory of capacity constraint can explain the underwriting cycle in property insurance industry of China,and the impact of interest rates on the underwriting cycle is also long-term and stable.However,for the entire industry,fluctuations in interest rates do not affect the industry’s underwriting capacity.In addition,underwriting profits are affected by inflation,and the property insurance industry is also greatly affected by its own market impact.