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Determination of Competitive Underwriting Profit Margins Using Arbitrage Pricing Theory Model

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  • Jorge Urrutia

Abstract

The determination of competitive of fair profit margins for the property-liability insurance industry is a controversial subject, especially because of the investment income. As is well known, investment income arises because of the lag between collection of premiums and payment of losses, and loss adjustment expenses. … The purpose of this article is the derivation of a model for the determination of underwriting return by line of insurance based on the Arbitrage pricing Theory. The proposed model considers the general case of a multi-line insurance firm, and incorporates the investment income and the probability of bankruptcy in the pricing formula. Empirical tests and sensitivity analysis of the proposed model are conducted by using a data sample of nationwide combined ratios.

Suggested Citation

  • Jorge Urrutia, 1987. "Determination of Competitive Underwriting Profit Margins Using Arbitrage Pricing Theory Model," Journal of Insurance Issues, Western Risk and Insurance Association, vol. 10(2), pages 61-77.
    • Handle: RePEc:wri:journl:v:10:y:1987:i:2:p:61-77
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    Cited by:

    1. Li Zhang & Norma Nielson, 2012. "Pricing for Multiline Insurer: Frictional Costs, Insolvency, and Asset Allocation," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 15(2), pages 129-152, September.

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