Presence of Underwriting Cycles in Russia
Fluctuations in premiums and profits from underwriting in the property and liability insurance industry exhibit a cyclical behavior, with hard and soft market phases. Soft markets are characterized by readily available coverage and low profits, while hard markets are characterized by difficulty in obtaining coverage and high profits. The presence of an underwriting cycle is a frequent phenomenon in many countries. For example, in the German insurance market, the cycle length is 5.3 years, and in Poland it is equal to 6.21 years. This paper attempts to prove the presence of the underwriting cycle in the Russian property and liability insurance industry. The question of whether the cycle exists has still not been examined for one simple reason - a lack of proper statistical information. Short time series are the main problem in studies devoted to the Russian insurance market. The first available statistical information appeared in 2005. From 2005 to 2013, information was gathered on different lines of property and liability insurance. Calculating the income from underwriting requires information about the amount of expenses. As it is impossible to define the expenses because of an absence of statistical data on the Russian insurance market (however, it is the same in the markets of many countries), a relative indicator which doesn’t include expenses was chosen. One such indicator is called a loss ratio, and it is the ratio of payments to underwriting revenue. Then, a second-order autoregressive model was used to obtain the required parameters to test for the presence of the underwriting cycle. The results of the second-order autoregressive model largely support the existence of the underwriting cycle in Russia. The calculations show that the length of the underwriting cycle for the entire property and liability insurance industry is equal to 6.05 years. However, different lines of business analyzed in the article are characterized by longer cycle lengths. The cycle length for CMTPL is equal to 6.18 years, and for property insurance - 6.28 years. These results are in accordance with the data gathered by J.D. Cummins and J.F. Outreville for U.S. and Western Europe insurance markets. In the civil liability insurance market, the cycle was absent. This result was predictable and corresponds with the state of affairs in Western countries. A high loss ratio variation coefficient of 0.44, which is much higher than corresponding values in other lines of business, can serve as indirect evidence for the absence of the cycle.