Abstract
Property—liability insurance contracts are characterized by a time lag between the premium payment and loss settlement dates. During this time lag, the insurance company earns investment income on the unexpended component of the premium. Given this timing difference, it is surprising that the recognition of investment income in ratemaking is a relatively recent phenomenon. Prior to the late 1960s, property—liability ratemaking formulas reflected a profit margin that was a flat percentage of the gross premium (usually 5%). The timing difference between premiums and claims and the resulting investment income were ignored in formal ratemaking procedures.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
Similar content being viewed by others
References
Arthur D. Little, Inc. Prices and Profits in Property and Liability Insurance: A Report to American Insurance Association. Boston: Arthur D. Little, 1967.
Biger, Nihum, and Yehuda Kahane. “Risk Considerations In Insurance Rate-making.” Journal of Risk and Insurance 45 (1978): 121–132.
Brealey, Richard A., and Stewart C. Myers. Principles of Corporate Finance. 3rd ed. New York: McGraw-Hill Book Co, 1988.
Cummins, J. David. “Capital Structure and Fair Profits In Property—Liability Insurance.” Working paper, University of Pennsylvania, 1988a.
Cummins, J. David. “Risk-Based Premiums for Insurance Guaranty Funds.” Journal of Finance 43 (1988b).
Cummins, J. David, “Multi-Period Discounted Cash Flow Ratemaking In Property—Liability Insurance.” Working paper, University of Pennsylvania, 1988c.
Cummins, J. David, and Lena Chang. “An Analysis of the New Jersey Formula for Including Investment Income In Property—Liability Insurance Ratemaking.” Journal of Insurance Regulation 1 (1983): 555–573.
Cummins, J. David, and Scott E. Harrington. “Property—Liability Insurance Rate Regulation: Estimation of Underwriting Betas Using Quarterly Profit Data.” Journal of Risk and Insurance 52 (1985): 16–43.
Cummins, J. David, and David J. Nye. “The Stochastic Characteristics of Property—Liability Insurance Profits.” Journal of Risk and Insurance 47 (1980): 61–80.
D’Arcy, Stephen, and Neil A. Doherty. Financial Theory of Insurance Pricing. Philadelphia: S. S. Huebner Foundation, 1988.
Doherty, Neil A., and James R. Garven. “Price Regulation in Property—Liability Insurance: A Contingent Claims Approach.” Journal of Finance 41 (1986): 1031–1050.
Fairley, William. “Investment Income and Profit Margins in Property—Liability Insurance: Theory and Empirical Tests.” Bell Journal 10 (1979): 192–210. Reprinted in J. D. Cummins and S. E. Harrington (eds.), Fair Rate of Return In Property—Liability Insurance. Norwell, MA: Kluwer Academic Publishers, 1987.
Fisher, F. M., and McGowan, J. J. “On the Misuse of Accounting Rates of Return to Infer Monopoly Profits.” American Economic Review 65 (1983): 82–97.
Francis, Jack Clark. Investment: Analysis and Management. 4th ed. New York: McGraw-Hill, 1986.
Hill, Raymond, and Franco Modigliani. “The Massachusetts Model of Profit Regulation in Non-Life Insurance.” In J. D. Cummins and S. E. Harrington (eds.), Fair Rate of Return in Property—Liability Insurance. Norwell, MA: Kluwer Academic Publishers, 1987.
Kraus, Alan, and Stephen Ross. “The Determination of Fair Profits for the Property —Liability Insurance Firm.” Journal of Finance 33 (1982): 1015–1028.
Myers, Stewart and Richard Cohn. “Insurance Rate Regulation and the Capital Asset Pricing Model.” In J. D. Cummins and S. E. Harrington (eds.), Fair Rate of Return in Property—Liability Insurance. Norwell, MA: Kluwer Academic Publishers, 1987.
National Association of Insurance Commissioners. Report of the Advisory Committee To the NAIC Task Force on Profitability and Investment Income. Kansas City, MO: National Association of Insurance Commissioners, 1983.
Ross, Stephen A., and Randolph Westerfield. Corporate Finance. St. Louis, MO: Times Mirror/Mosby College Publishing, 1988.
Taylor, Gregory C. Claim Reserving In Non-Life Insurance. New York: North-Holland, 1986.
Venezian, Emilio C. “Are Insurers Underearning?” Journal of Risk and Insurance 51 (1984): 150–156.
Williams, C. Arthur Jr. “Regulating Property Liability Insurance Rates Through Excess Profits Statutes.” Journal of Risk and Insurance 50 (1983): 445–472.
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 1990 Kluwer Academic Publishers
About this chapter
Cite this chapter
Cummins, J.D. (1990). Discounted Cash-Flow Ratemaking Models in Property—Liability Insurance. In: Borba, P.S., Appel, D. (eds) Benefits, Costs, and Cycles in Workers’ Compensation. Huebner International Series on Risk, Insurance, and Economic Security, vol 9. Springer, Dordrecht. https://doi.org/10.1007/978-94-009-2179-5_7
Download citation
DOI: https://doi.org/10.1007/978-94-009-2179-5_7
Publisher Name: Springer, Dordrecht
Print ISBN: 978-94-010-7476-6
Online ISBN: 978-94-009-2179-5
eBook Packages: Springer Book Archive