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The dynamics of insurance prices


Henriet, Dominique; Klimenko, Nataliya; Rochet, Jean-Charles (2016). The dynamics of insurance prices. The Geneva Risk and Insurance Review, 41(1):2-18.

Abstract

We develop a continuous-time general-equilibrium model to rationalise the dynamics of insurance prices in a competitive insurance market with financial frictions. Insurance companies choose underwriting and financing policies to maximise shareholder value. The equilibrium price dynamics are explicit, which allows simple numerical simulations and generates testable implications. In particular, we find that the equilibrium price of insurance is (weakly) predictable and the insurance sector always realises positive expected profits. Moreover, rather than true cycles, insurance prices exhibit asymmetric reversals caused by the reflection of the aggregate capacity process at the dividend and recapitalisation boundaries.

Abstract

We develop a continuous-time general-equilibrium model to rationalise the dynamics of insurance prices in a competitive insurance market with financial frictions. Insurance companies choose underwriting and financing policies to maximise shareholder value. The equilibrium price dynamics are explicit, which allows simple numerical simulations and generates testable implications. In particular, we find that the equilibrium price of insurance is (weakly) predictable and the insurance sector always realises positive expected profits. Moreover, rather than true cycles, insurance prices exhibit asymmetric reversals caused by the reflection of the aggregate capacity process at the dividend and recapitalisation boundaries.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:2016
Deposited On:06 Jan 2017 14:20
Last Modified:04 Sep 2017 00:00
Publisher:Palgrave Macmillan Ltd.
ISSN:1554-964X
Additional Information:This is a post-peer-review, pre-copyedit version of an article published in The Geneva Risk and Insurance Review. The definitive publisher-authenticated version Henriet, D., Klimenko, N. & Rochet, JC. Geneva Risk Insur Rev (2016) 41: 2 is available online at: doi:10.1057/grir.2015.5
Publisher DOI:https://doi.org/10.1057/grir.2015.5
Related URLs:http://www.palgrave-journals.com/grir/journal/v41/n1/abs/grir20155a.html (Publisher)
Other Identification Number:merlin-id:13294

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