The Property/Liability Insurance Cycle: A Comparison of Alternative Models

Abstract

The objective of this paper is to compare alternative models of insurance pricing as theories of the property‐liability underwriting cycle. The existing literature has focused on comparing two models, the financial pricing and capacity constraint models. However, these are not the only relevant models. We show that six alternative models imply the same general form of the pricing equation. We apply the model to data on stock property‐liability insurers for the period 1935‐1997. We find that the actuarial model and the capacity constraint hypothesis are the only theoretical models that are consistent with the data.