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Profit Regulation in Property-Liability Insurance

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  • Raymond D. Hill
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    Abstract

    There has been substantial interest in the question of how (and whether) to allow for investment income in setting rates for property-liability insurers. In a sense this interest is premature, since the fair (i.e., competitive) total profit for an insurance firm has not been defined except by unsupported rules of thumb. This article uses the capital asset pricing model to determine the competitive insurance premium and profit rate. Fair profit rates for real lines of insurance are then calculated and compared with actual profit rates. The comparison suggests that rule-of-thumb profit rates used in regulation are above the level that would occur in a competitive insurance market.

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    Bibliographic Info

    Article provided by The RAND Corporation in its journal Bell Journal of Economics.

    Volume (Year): 10 (1979)
    Issue (Month): 1 (Spring)
    Pages: 172-191

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    Handle: RePEc:rje:bellje:v:10:y:1979:i:spring:p:172-191

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    Cited by:
    1. Ralph A. Winter, 1991. "The Liability Insurance Market," Journal of Economic Perspectives, American Economic Association, vol. 5(3), pages 115-136, Summer.
    2. Li-Hua Lai, 2006. "Underwriting profit margin of P/L insurance in the fuzzy-ICAPM," The Geneva Papers on Risk and Insurance Theory, Springer, vol. 31(1), pages 23-34, July.
    3. Anne Gron & Deborah Lucas, 1995. "External Financing and Insurance Cycles," NBER Working Papers 5229, National Bureau of Economic Research, Inc.

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