Interest Rates and Profit Cycles: A Disaggregated Approach

Several researchers contend that profits of the property-liability insurance industry are cyclical, and attribute this to a variety of causes, such as regulatory lags, interest rates, changes in capital flows into the industry, adaptation under imperfect information, and procedural lags in the process of estimating marginal costs. This prior research is expanded in the following ways: 1. by introducing financial variables to reflect the effect of investment returns for individual lines of insurance, 2. by allowing the error terms in various lines of insurance to be contemporaneously correlated, and 3. by determining whether an aggregate model for the industry or separate models for individual lines are more consistent with the data. The results support the hypothesis that separate lines of insurance have individual cycles that vary from each other in period and in phase.