A Growth Theory for the Insurance Industry

Insurance economics models of statics and comparative statics assume that the process of economic adjustment must inevitably lead to equilibrium. The question of attainability of equilibrium has not been addressed so far. This is the domain of dynamic analysis. In this article, we develop a model of economic growth for the insurance industry. The production function of the insurance industry is based on the assumption that the output, “incurred losses,” is a function of “invested assets” and “other labor and nonlabor inputs.” The latter grow at the rate n, a proxy of the growth rate of insurance expenses. The assets–inputs ratio, r, characterizes the steady‐state growth path that the insurance industry eventually attains. The adjustment process takes place through the assets–losses ratio, v, which is affected by the insurance leverage, the loss ratio, and the insurance exposure of the insurance industry. An insurance industry that has reached a steady state will have its output growing at the rate n +π, where π is the growth rate of average productivity. The incremental reserve ratio, s, determines definitely a steady‐state growth path for the insurance industry. An increase or decrease in s may move the insurance industry to a higher or lower growth path. We suggest that this analysis provides a stronger theoretical context for analyzing dynamic phenomena in the insurance industry.