What’s underwriting Cycle for casualty insurance companies? It seems to be related to business cycle. At the trough, they earn little, and at the top, they make a boat load of money. If that’s the case, why they just call it economic cycle? Any comments?
Not sure - but it’s probably only relevant to know that in downturns their claims may exceed new underwriting, and therefore they must manage portfolios to this potential shortfall (i.e. predictable investment income, and/or maturities).
underwriting cycle is similar as loan loss cycle. for example, a 3-5 yrs loan usually suffer the largest loss around the 2-3 yrs. business cycle influence underwriting cycle through impacting borrowers’ income, thus paying ability.
I am not sure if I understood underwriting cycle to be driven by business cycle. My two cents on the same are the P&C insurance companies responding to business competition tend to underwrite at a loss during periods of high competition while the behavior of the underwritten event remains at normal levels. This leads to losses in the business.
Thanks, guys. Very helpful answers. I kind of get a sense what underwriting cycle really means now. Sometime it’s hard for an outsider like me to understand an insurance concept by reading a simple definition in the CFAI text.
Underwriting cycle (normally lasting 3-5 yrs) is not the same as business cycle but its related to it. usually towards the end of the under-writing cycle (close to 4.5 - 5 yr timeframe) losses are maximum and claims are highest. at this point, casualty cos are better off holding taxable bonds in their portfolios amidst huge losses and are better off holding a greater % of tax-exempt bonds towards the peak of the under-writing cycle.
This one could help. http://www.analystforum.com/phorums/read.php?13,959701,960125#msg-960125