Extract
Nonlinear Cointegration Relationships Between Non-Life Insurance Premiums and Financial Markets
INTRODUCTION
Several theoretical and empirical studies focused on the explanation of the fluctuations of premiums and profits in the insurance industry and concluded there is a cyclical movement in insurance dynamics (Winter, 1994; Harrington and Niehaus, 2000). In such a context, these studies showed that the underwriting cycle, largely observed in the United States, could exist in other developed countries because of the proliferation of international reinsurance services (Cummins and Outreville, 1987; Cuinmins and Patricia, 1997), the integration of financial markets (SwissRe, 2001), and the interdependence of economic activities (Leng and Meier, 2006). According to these studies, the average cycle period is about 6-8 years, but this period generally varies across lines and among countries.Besides, the causes of this underwriting cycle were the subject of several studies that developed many explanations in the literature. Among these explanations, we retain: (1) the rate-making process (Venezian, 1985); (2) the capacity constraints (Gron, 1994) and the institutional, regulatory, and accounting characteristics (Cummins and Outreville, 1987; Lamm-Tennant and Weiss, 1997); (3) the fluctuations of interest rates (Doherty and Garven, 1992; Fields and Venezian, 1989; Haley, 1993; Fung et al., 1998; Leng and Meier, 2006; Meier and Outreville, 2006); and (4) the fluctuations of stock markets (Cummins and Nye, 1980; Lamm-Tennant and Weiss, 1997; Chen et al., 1999). In this article, we focused our study on the exploration of the elements (3) and (4) while examining the non-life insurance premium (NLIP).In practice, the empirical studies that focused on this topic and on the study of the possible linkages between financial markets and insurance markets are not numerous in the literature. Doherty and Garven (1992), Fields and Venezian (1989), Smith (1989), and Fung et al. (1998) showed that changes in insurance premiums are related to those in interest rates, whereas Lamm-Tennant and Weiss (1997) and Chen et al. (1999) retained changes in stock market returns to explain the NLIP fluctuations. Formally, this implied two types of approaches. On the one hand, most of the authors considered the series in the first difference and studied only the short-term adjustment dynamics of insurance premiums. On the other hand, other studies used the linear cointegration framework, which enables exarnination of the relationship between the NLIP and interest rates in the long term (Haley, 1993; Grace and Hotchkiss, 1995; Leng and Meier, 2006; Meier and Outreville, 2006). Using the same framework, Blondeau (2001) studied the relationship between stock market returns and the insurance premium. In this article, we first stud...See the full content of this document
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