A micro-econometric model of the UK property-liability insurance industry

The aim of this study is to assess the effect of claims and expenses on premiums for the UK property-liability insurance industry. A cointegration approach of a multivariate system of equations is applied to disentangle the causal relationships between premiums, claims and expenses. The findings reveal that, in the long run, claims and expenses cause premiums, supporting the ' rational expectations ’ and the ' institutional rigidities ’ hypotheses. A dynamic analysis, using the impulse response functions, confirm the positive impact of claims on premiums, whilst premiums also positively affect claims, underlying that the former are price sensitive.