An Empirical Evaluation of Property-Liability Insurance Financial Ratemaking Models
Dyer, Mike Ancil
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https://hdl.handle.net/2142/72585
Description
Title
An Empirical Evaluation of Property-Liability Insurance Financial Ratemaking Models
Author(s)
Dyer, Mike Ancil
Issue Date
1992
Doctoral Committee Chair(s)
D'Arcy, S.,
Department of Study
Finance
Discipline
Finance
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Economics, Finance
Abstract
This research examines several financial models that have been developed for rate regulation and ratemaking of property-liability insurers over the past fifteen to twenty years. Empirical model estimates of underwriting profit margins for twenty-three individual stock insurance companies are compared with actual underwriting results over the 1973-1989 period. This approach differs from previous research that has used aggregate industry data. The models tested are the total target rate of return model, Fairley's insurance CAPM with tax extensions by Hill and Modigliani, Myers and Cohn's discounted cash flow model, and Doherty and Garven's option pricing model. The goal of this research is to identify promising models for regulators and actuaries and illustrate how they can be used with individual company data.
The results indicate that a CAPM-based target total rate of return approach using the previous year's net investment income to estimate the current year's investment return may yield a promising estimate of underwriting profit margins to guide insurers and regulators in setting premiums. A similar approach is commonly used for utility rate regulation. Due to data limitations, such as actual knowledge of time lags between receipt of premiums and payment of claims and the necessary use of nation-wide data when rates are regulated on a state by state basis, conclusive support of an individual model is difficult to achieve. However, this research is a major step in estimating the four models and toward areas of future research in financial ratemaking models.
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