Asymmetric dynamics of insurance premium: the impacts of output and economic policy uncertainty

Abstract

This paper investigates the asymmetric and nonlinear transmission of real output and economic policy uncertainty to insurance premiums for the US economy over the annual period of 1980–2014. Using the most up-to-date nonlinear autoregressive distributed lags framework, we simultaneously examine short- and long-run asymmetric responses of insurance premiums through positive and negative partial sum decompositions of changes in the explanatory variables. Our empirical results reveal that real output and economic policy uncertainties both affect insurance premiums in an asymmetric and nonlinear manner, but the transmission mechanism is not the same. As to the impact of real output, we find that an increase in real output leads to enhancing the insurance premiums, while a decrease in output has a greater impact causing insurance premiums to move down. For the impact of economic policy uncertainty, the results also suggest that total and non-life insurance premiums increase with rising uncertainty, while life insurance premiums decrease with rising uncertainty. These results have significant implications for insurance-related econometric analysis, investment decisions, forecasting, and policy-making.