The Underwriting Cycle and the Risk Manager: Authors' Reply

Abstract

We would like to take the opportunity to reply to Mark Jablonowski's comment on our article entitled Underwriting Cycle and the Risk Manager. We believe that the statistical algorithm used in our article is not novel in its approach. Instead it merely takes the basic cycle algorithm a step further. The fact that this algorithm takes into consideration the possibility of structural change, in this instance the upward trend in combined ratios over time, makes it an appropriate tool for this analysis. One can always argue as to the ability of econometric tools to evaluate any set of variables over time. In his own articles (see Jablonowski's references), no statistical basis for his conclusions about the underwriting cycle is offered. Obviously, we differ with Jablonowski as to the ability of econometric tools to determine or evaluate an underwriting cycle, but argue that our statistical approach is not novel. Our sample size was not small. We looked at the combined ratio for the years 1945 to 1983. This provided us with 39 years of data. This is more than an adequate number of data points for our statistical model. We could not have realistically expanded our data base. The primary purpose of the article was to attempt to statistically measure if an underwriting cycle existed over previous years (1945-83). In our opinion, we adequately showed that a cycle of approximately six years in length existed over the years studied. It was not our intent to attempt to predict future cycles. We never hypothesized a six-year cycle. However, the upward trend in combined ratio from 1979 to 1984 does not disconfirm the existence of a six-year underwriting cycle over the years 1945 to 1983. It does confirm our conclusion that the magnitude of the peaks in the cycle have been increasing over time. Perhaps this explains Jablonowski's observation of the steady upward trend in combined ratio from 1979 to 1984. Perhaps if one were to change the time period considered from 1945-1983 to 1975-1988 the