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Investment Income and Profit Margins in Property-Liability Insurance: Theory and Empirical Results

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  • William B. Fairley

Abstract

Capital market equilibrium rates of return on equity for property-liability insurers and underwriting profit margins by line that are consistent with these are derived by using the capital asset pricing model and measurements of cash flows by line. The profit solutions depend on the cash flows and systematic risks of the lines and on the yield of risk-free securities, but not on company investment portfolios. Recent historical profit margins by line are shown to be much closer to the solutions derived than to the traditional profit margin factors routinely included in rate filings in almost every state.

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  • William B. Fairley, 1979. "Investment Income and Profit Margins in Property-Liability Insurance: Theory and Empirical Results," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 192-210, Spring.
    • Handle: RePEc:rje:bellje:v:10:y:1979:i:spring:p:192-210
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