Download Fair Rate of Return in Property-Liability Insurance by William B. Fairley (auth.), J. David Cummins, Scott E. PDF

By William B. Fairley (auth.), J. David Cummins, Scott E. Harrington (eds.)

Property-liability coverage premiums for many traces of industrial are regulated in approximately one-half of the states. commonly, this me ans that charges has to be filed with the country assurance commissioner and licensed sooner than use. the rest of the states have a number of sorts of aggressive ranking legislation. those both require that charges be filed sooner than use yet needn't be licensed or that premiums needn't be filed in any respect. country ranking legislation are summarized in Rand company (1985). The principal kind of coverage expense legislation, previous approval, all started within the past due Forties following the V. S. preferrred courtroom selection in usa vs. South-Eastern Underwriters organization, 322 V. S. 533 (1944). This was once an anti belief case regarding one in all 4 nearby associa­ tions of insurance firms, which constituted an assurance cartel. The case struck down an previous determination, Paul vs. Virginia, eight Wall 168 (1869), maintaining that the enterprise of coverage was once now not interstate trade and as a result that country legislation of assurance didn't violate the trade clause of the V. S. structure. Following South-Eastern Underwriters, the Vnited States Congress handed the McCarran-Ferguson Act, which held that persisted nation legislation and taxation of coverage was once within the public curiosity. The act additionally held that the federal antitrust legislation wouldn't follow to assurance to the level that the enterprise used to be correctly regulated through nation legislations. (See V. S. division of Justice 1977.

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The practical effect of using embedded yields is to understate the profit ability of ins uran ce when yields are rising and to overstate it when yields are falling. Only current yields will insure that regulation meets a "capital attraction" standard at all times. Second, the use of Treasury bill rates insulates policyholders from the risk of insurance company investments. In a competitive market, an insurance company that tried to recoup past investment losses by charging current policyholders higher premiums would rapidly lose business.

1972b. On the use of beta in regulatory proceedings: A comment. Bell Journal of Economics 3(Autumn):622-627. Myers, S. , and S. M. Turnbul\. Capital budgeting and the capital asset pricing model: Good news and bad news. Journal of Finance 32(May):321-333. National Association of Insurance Commissioners. 1970. Measurement of profitability and treatment of investment income in property and li ability insuranee. Proceedings of the NAIC. Peseau, D. , and T. M. Zepp. 1978. On the use ofthe CAPM in publie utility rate cases: Comment.

Treasury shares in the firm's risk),z Each of these sources of variation in firm risk can be controlied for, however, so that they do not affect the measurement of underwriting risk. An example may help to illustrate this point. , Hamada 1972) that a firm's risk depends on its financial structure. Thus, while the manufacture of steel may be assumed to have approximately the same risk whether carried out by the Bethlehem Steel Company 30 FAIR RATE OF RETURN IN PROPERTY-LIABILITY INSURANCE or by Republic Steel, if Bethlehem operates at a higher level of financial leverage (a higher debt/equity ratio) than Republic, the risk of Bethlehem's stock also will be high er.

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