Insurance Cycles and Capital: The Past, Present and Future

How will the increasing use of alternative risk financing and the increasing corporate risk retention affect insurance cycles? This article addresses these issues in the context of the role of capital in insurance cycles. Research, both theoretical and empirical, indicates that temporary capital shortages play an important role in insurance cycles. This article argues that the increasing use of alternative risk financing mechanisms will tend to create excess insurance supply in the short run and to reduce the magnitude and duration of insurance cycles in the long run. In contrast, the trend toward greater risk retention by corporations will shift more of the impact of significant, unanticipated losses onto corporations, resulting in more volatile demand for insurance.