Do Property-Casualty Insurance Underwriting Margins Have Unit Roots?
Author InfoScott E. Harrington Tong Yu Abstract A growing literature analyzes determinants of insurance prices using time series data on insurer underwriting margins. If the variables analyzed are stationary, conventional regression models may be appropriately used to test hypotheses. Based on pretests for a unit root, several studies have instead used co-integration analysis to analyze the long-run relationship between purportedly nonstationary underwriting margins and macroeconomic variables. We apply a battery of unit root tests to investigate whether underwriting margins are stationary under different assumptions concerning deterministic components in the data generating process (DGP). When linear and/or quadratic trends are included in the assumed DGPs, the tests reject the null hypothesis of a unit root for loss ratios, expense ratios, combined ratios, and economic loss ratios from 1953 through 1998 for many of the individual lines examined and for all lines combined. Consistent
