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1987 | Buch

Fair Rate of Return in Property-Liability Insurance

herausgegeben von: J. David Cummins, Scott E. Harrington

Verlag: Springer Netherlands

Buchreihe : Catastrophe Modeling

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Property-liability insurance rates for most lines of business are regulated in about one-half of the states. In most cases, this me ans that rates must be filed with the state insurance commissioner and approved prior to use. The remainder of the states have various forms of competitive rating laws. These either require that rates be filed prior to use but need not be approved or that rates need not be filed at all. State rating laws are summarized in Rand Corporation (1985). The predominant form of insurance rate regulation, prior approval, began in the late 1940s following the V. S. Supreme Court decision in United States vs. South-Eastern Underwriters Association, 322 V. S. 533 (1944). This was an anti trust case involving one of four regional associa­ tions of insurance companies, which constituted an insurance cartel. The case struck down an earlier decision, Paul vs. Virginia, 8 Wall 168 (1869), holding that the business of insurance was not interstate commerce and hence that state regulation of insurance did not violate the commerce clause of the V. S. Constitution. Following South-Eastern Underwriters, the Vnited States Congress passed the McCarran-Ferguson Act, which held that continued state regulation and taxation of insurance was in the public interest. The act also held that the federal antitrust laws would not apply to insurance to the extent that the business was adequately regulated by state law. (See V. S. Department of Justice 1977.

Inhaltsverzeichnis

Frontmatter
1. Investment Income and Profit Margins in Property-Liability Insurance: Theory and Empirical Results
Abstract
The present analysis applies the capital-asset pricing model (CAPM) of contemporary financial theory to derive risk-adjusted rates of return that the capital markets require of stock property-liability insurers. The required profit margins in insurance premiums for the major property-liability lines that are consistent with these rates of return are derived using estimated multiquarter cash flows for premiums and costs. These margins have been used by the Massachusetts Commissioner of Insurance in rate decisions or rate reviews for all the major property-liability lines and for medical malpractice insurance. They represent an effort to bring the consideration of insurer profits within a framework of modern financial theory. A distinctive feature of the margins developed here is that, because they do not depend upon actual investment results for insurers’ portfolios, they offer a nonintrusive regulatory solution of the long controversy over the use of investment income in insurance rate setting.1
William B. Fairley
2. The Massachusetts Model of Profit Regulation in Nonlife Insurance: An Appraisal and Extensions
Abstract
In the late 1970s, a number of economists applied the Capital Asset Pricing Model (CAPM) to the problem of pricing insurance contracts (e.g., Munch and Smallwood 1978, Fairley, 1979, and Hill 1979). The CAPM offered a means of systematically accounting for the investment income of insurance companies and an operational definition of the risk of underwriting. In 1977, William Fairley used the CAPM to build a model for the regulatory determination of profit margins in Massachusetts. The Fairley model has played a major role in rate hearings in Massachusetts since its introduction. It has become generally known as the “Massachusetts” model of profit regulation. The purpose of this chapter is to provide a critical appraisal of the use of the Fairley model as a regulatory tool. The theoretical foundations of the model are reviewed, several extensions of its basic specification are suggested, and additional empirical evidence on its reliability and stability is provided.
Raymond D. Hill, Franco Modigliani
3. A Discounted Cash Flow Approach to Property-Liability Insurance Rate Regulation
Abstract
This chapter begins by considering how a fair system of rate regulation—fair to both policyholders and insurance-company stockholders—would work. This question is usually answered by defining a fair rate of return. However, fairness can be more clearly and generally defined in terms of present value.
Stewart C. Myers, Richard A. Cohn
4. Insurance in an Equilibrium Asset-Pricing Model
Abstract
This chapter presents a model of the demand for insurance company shares and insurance policies. Individuals in the model respond to uncertainty about real assets by purchasing insurance policies and insurance company shares. Insurance firms arise naturally in the model as risk-sharing devices. This chapter analyzes the nature of individual demand functions to establish equilibrium prices for insurance policies and insurance shares. Although the chapter focuses on insurance activity, equilibrium prices for securities and real assets also are derived.
Andrew L. Turner
5. The Determination of Fair Profits for the Property-Liability Insurance Firm
Abstract
Although the property-liability insurance industry has been subject to price regulation for many years, surprisingly little research has been directed at producing valuation models of a property-liability insurance firm. Although property-liability price regulation has historically involved setting minimum prices to reduce the risk of insolvency, some commissions have begun to move toward setting prices more in the spirit of public utility regulation.1 If, in an effort to promote efficiency, the working objective of such regulation requires the determination of prices that would prevail under competition, then regulation must be founded on some model of the costs of regulated firms. Under competition with free entry, prices just cover all economic costs, including the opportunity costs of investment by suppliers of capital, and a valuation model is required to explain how the market value of the firm, and therefore the cost of capital, reacts to changes in the prices it charges. Our objective in this chapter is to provide such a framework.
Alan Kraus, Stephen A. Ross
6. The Use of Investment Income in Massachusetts Private Passenger Automobile and Workers’ Compensation Ratemaking
Abstract
It seems that Massachusetts is known throughout the property-casualty insurance world for its unusual system of ratemaking. Except for a brief hiatus in 1977, private passenger automobile insurance rates have been set annually by the Commissioner of Insurance for use by all companies writing business in the Commonwealth. The workers’ compensation line is regulated similarly but with an independent industry bureau making filings for rate changes. Those rate changes, however, need the prior approval of the Commissioner of Insurance before taking effect. The workers’ compensation rates are also used by all companies operating in Massachusetts. This close regulation of the two major lines of property-casualty insurance is chiefly responsible for the divergence of Massachusetts ratemaking methods from those employed in the rest of the United States. This chapter reviews the development of the methodology used to establish underwriting profit provisions for these two lines under rate regulation in Massachusetts during the period 1975–1983.
Richard A. Derrig
Backmatter
Metadaten
Titel
Fair Rate of Return in Property-Liability Insurance
herausgegeben von
J. David Cummins
Scott E. Harrington
Copyright-Jahr
1987
Verlag
Springer Netherlands
Electronic ISBN
978-94-015-7753-3
Print ISBN
978-94-015-7755-7
DOI
https://doi.org/10.1007/978-94-015-7753-3