The Satellite Insurance Market and Underwriting Cycles

Introduction

Underwriting cycles in property-liability insurance have been extensively documented over the past half-century in many countries and many lines of insurance.¹ The underwriting cycle is defined as alternating periods of hard markets in which insurance prices and insurer profitability are high and soft markets with low insurance prices and low insurer profitability. Most of the research documenting the existence of cycles relies on the time series behaviour of published underwriting information on loss ratios and underwriting profits. Theories have arisen to explain the existence of underwriting cycles, and these frequently rely on how the insurance product is priced. Some theories emphasize the institutional, accounting and regulatory impact on loss ratios and underwriting profits, while others focus on shocks such as loss, interes, and/or demand and supply shocks. ²

But insurance is unlike many other goods in that in some lines there may be no price at which customers can buy all of the quantity (coverage) desired. Instead, the insurance product is a package which is a function of rate per dollar of coverage and quantity (the amount of coverage available). Previous empirical underwriting cycle research has been unable to distinguish between the amount of coverage available and the rate for coverage, largely because data is unavailable. Thus as the market hardens, for example, researchers do not know whether increases in the price of insurance are caused by an increase in the price per exposure, a reduction of coverage availability, or both.

The purpose of this research is to investigate the cyclic behaviour of price per dollar of coverage vis-à-vis amount of coverage available in a relatively new, volatile, international and important insurance line: satellite insurance. More specifically, the time series behaviour of rates-on-line and annual industry-wide coverage availability (or capacity) per new satellite launch are analysed to determine whether one or both of these premium components are cyclic. In particular, two prominent underwriting cycle theories, the rational expectations/institutional intervention hypothesis ³ and the capacity constraint theory⁴ , are tested with satellite insurance industry data.⁵ Our analysis provides for a much richer understanding of the performance of this line of insurance over time and the applicability of certain underwriting cycle theories than is possible in previously published underwriting cycle studies.

The...