Understanding Cycles and Shocks in the Property and Casualty Insurance
Industry
Lessons Learned from Experience
By Harry Shuford
Harry Shuford is chief economist
in the actuarial and economic
services division,
National Council on
Compensation Insurance. His
research at NCCI has addressed
workers compensation-related
issues in corporate finance,
trends in loss costs, analysis of
catastrophic risk, and the underwriting cycle. He has a Ph.D. in economics from
Yale University and has worked in banking, served as
director of policy analysis for the NYC Department of
Social Services, and was global director of the actuarial
and financial consulting practice at a global insurance
services firm. In addition he was executive director of the
Perth Amboy Redevelopment Agency and taught finance
at New York University.
The experience of the property and casualty (P&C) insurance
industry provides insights into the nature of financial
shocks and cycles. The evidence indicates that:
Shocks do not contribute to the underwriting cycle
because they are random and, hence, taken as not
being truly representative of the future of “business as
usual.”
Shocks do affect underwriting practices by initiating
efforts to eliminate or mitigate a newly perceived risk
from interfering with “business as usual.”
Shocks in the P&C industry have been more psychological
than financial due to the protection of diversification.
Cycles in premium income and underwriting can be
attributed to underwriting decisions driven by the
anticipated profitability of writing P&C insurance.
By Harry Shuford