Ratemaking Methods and Profit Cycles in Property and Liability Insurance

Insurers and rating bureaus often use regression of past costs, or of loss ratios, on time as a way of estimating future rate requirements. A model of this process suggests that the rates set by such methods would create a quasi-cyclical pattern of underwriting profit margins. The details of the forecasting method determine the characteristics of the cylical pattern, so different lines may have different periods or different phases. Empirical data on major lines of property and liability insurance are consistent with the hypothesis that ratemaking methods contribute to the fluctuations of underwriting profit margins.