Investigating the stationarity of insurance premiums: international evidence

Abstract

This article explores whether there is support for the stationarity hypotheses of life and non-life insurance premiums during the period 1979–2007 for 40 heterogeneous countries. The stationarity of insurance premiums affects insurance companies’ prediction on their future inflow of premium income, which affects the liquidity of insurance companies and their investment plans and thus is relevant to the insurers’ operation. This article employs the advanced nonlinear panel unit-root test with a sequential panel selection method to classify the entire panel into two groups: stationary countries and non-stationary countries. We apply Monte Carlo simulations to derive empirical distributions of the test, which allows us to correct for the finite-sample bias and to consider the cross-country effects. We find relatively stationary life insurance premiums in countries from the following groups: high-income, Europe, and common law origin; relatively stationary non-life insurance premiums exist in the following groups: low-income, Middle East and Africa, and common law origin. Evidence herein shows that different classifications, including income levels, geographic regions, regionally or economically integrated blocs, and legal system, affect the stationarity of life and non-life insurance premiums.

Keywords:

• insurance premiums
• nonlinear panel unit-root test
• cross-country dependence
• Monte Carlo simulations

JEL Classification :

• C33
• C53
• G22

Acknowledgements

The authors would like to thank the editor, Professor Chris Adcock, and the two anonymous referees for their highly constructive comments. We are also grateful to the National Science Council of Taiwan for financial support through grant 100-2410-H-110-027-MY2.