UNDERWRITING PROFITS AND CAPITAL MARKET: A SIMULTANEOUS EQUATION APPROACH

Han B. Kang
Illinois State University
ABSTRACT
The primary objective of the study is to offer a simultaneous equation model for
explaining cyclical underwriting profits. This study makes an attempt to explain the unstable
insurance business based on a joint equilibrium model of insurance and capital markets. An
insurer is a financial intermediary who raises funds in the insurance market and invests in the
capital market. Therefore, insurance business cannot be explained alone without capital market
conditions. A structural equation model is developed and estimated using the two stage least
square (2SLS) method. Both linear and log-linear models are developed and estimated. The
empirical results of the linear model support the hypothesis that insurance businesses are related
to capital market equilibrium.