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Bulletin n°20 / vol. 10 / Juillet 2010 - Décembre 2010 Le BFA sur internet
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The Underwriting Cycles under Solvency II

DERIEN A.


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Abstract



The presence of the underwriting cycle in non-life insurance is well established. In recent years this subject has been renewed with the focus on the new European Directive, Solvency II, which supports the need to hold capital due to the uncertainty about the insurance premium. The standard formula used ignores the existence of two regimes, one where the premiums increase (a hard market) followed by an another where the premiums decrease (a soft market). We use a regime switching model to demonstrate the dynamic change of the variables and how it could be used in an internal model. Our analysis has been performed on the Motor Liability, Motor Damage and Property lines in the French market. The results support the main theories of the underwriting cycle and the need to allow a different behavior of the variables across the cycle. We suggest another specification for the premium risk in the standard formula.