Abstract for: Cycles in Casualty: An Examination of Profit Cycles in the Insurance Industry

Aggregate earnings for the property-casualty insurance industry have exhibited cyclical behavior for decades. I develop a dynamic model of the insurance industry with endogenous premium setting, risk aversion, and other feedbacks; and use the model to identify strategies to mitigate the cycle. In addition to documenting a model, the paper showcases strategies for building confidence in system dynamics models when only some quantitative data is available. Using these tests I suggest that the premium setting process is fundamentally important for determining the stability of insurance industry profits.