Applications of Financial Pricing Models in Property-liability Insurance

This chapter provides a comprehensive survey of the literature on the financial pricing of property-liability insurance and provides some extensions of the existing literature. Financial prices for insurance reflect equilibrium relationships between risk and return or, minimally, avoid the creation of arbitrage opportunities. We discuss insurance pricing models based on the capital asset pricing model, the intertemporal capital asset pricing model, arbitrage pricing theory, and option pricing theory. Discrete time discounted cash flow models based on the net present value and internal rate of return approaches are also discussed as well as pricing models insurance derivatives such as catastrophic risk call spreads and bonds. We provide a number of suggestions for future research.