The Theory of Optimal Stochastic Control as Applied to Insurance Underwriting Cycles. Issue 4 (1st October 2016)

• Record Type: Journal Article
• Authors: Eckles, David L.; McCarthy, David G.; Zeng, Xudong
• Is Part Of: North American actuarial journal. Volume 20:Issue 4(2016)
• Page Start: 327
• Page End: 340
• Publication Date: 2016-10-01
• Subjects: Life insurance -- Research -- North America -- Periodicals; Actuarial science -- North America -- Periodicals; Web sites; Electronic journals; 368.010973
• DOI: 10.1080/10920277.2016.1179122
• Languages: English
• ISSNs: 2325-0453

Abstract

Abstract : We use the theories of optimal stochastic control and engineering process control to analyze the well-known phenomenon of insurance underwriting cycles in continuous time. We show in a continuous time framework that underwriting cycles can be explained with a model where premiums are set rationally, but where there are various reporting and regulatory lags. We find that the observed cycle length depends on the length of these underlying lags. Our result can be seen as consistent with previous empirical work showing underwriting cycles varying across countries and lines of insurance. In the event that no lags exist, our result is also consistent with more recent literature suggesting that insurance cycles may not exist.