Ordinary and Markov-Switching Autoregressive Models for Firm-Level Underwriting Data

Abstract

For many decades, the analysis of underwriting-profitability regimes (i. e. successive “hard” and “soft” markets) has formed an important topic in insurance research. In the present article, we study the characteristics of firm-level underwriting results by applying both ordinary and Markov-switching autoregressive models to data from individual U.S. property-liability companies. The research employs both univariate and multivariate methods. Our analysis argues against the existence of distinct, firm-level underwriting regimes in the U.S. property-liability market, but offers evidence of cross-company interactions over time.

Loss ratio dynamics

“…A set of papers using methods similar to those here are Higgins and Thistle (2000) and Feng et al (2017), who use long annual periods but attempt to discern differences in hard or soft markets by using a Markov switching model to assess the possibility of different regimes existing over time. We use a Markov switching model for similar reasons to determine if there are different regimes and then look at the change from one regime to another.…”