Demonstration Research of Financial Pricing Models for Property/Casualty Insurer
|School||Tianjin University of Finance and Economics|
|Keywords||Financial Pricing Models for Property/Casualty Insurer Target Total Rate of Return Model Insurance Capital Asset Pricing Model Discounted Cash Flow Model Internal Rate of Return Model Option Pricing Model Arbitrage Pricing Model|
Ratemaking techniques for property/casualty insurers are rather important contents all along. Thedetermination of a “fair,” or competitive, rate of return for property/casualty insuranceunderwriting operations has been the subject of increasing scrutiny over the last several decadesamong both academics and insurance practitioners. A number of property/casualty insurancepricing models have been proposed, developed, and/or applied, they also made up somelimitations in traditional pricing models. Four parts are contained in the paper.The first part summarizes the traditional pricing models that are basis for alternative pricingmodels which base on classic investment theories simultaneously.The second part specifies a variety of financial pricing models that have been proposed forproperty/casualty insurance, including the Target Total Rate of Return approach, the CapitalAsset Pricing Model, several Discounted Cash Flow approaches, the Internal Rate of ReturnModel, the Option Pricing Model, and the Arbitrage Pricing model. The specification istheoretical consideration.The third part introduces financial statements of all the variables used in a representative insurer(PICC) and generates a financial statement for a representative insurer and then applies eachpricing model to this insurer to determine the appropriate premium level and underwriting profitmargin. Finally, the models are examined over a range of parameter values that occur acrossinsurers and over time to demonstrate which parameters need to be measured most accurately,and which models are most impacted by changes in different variables. This analysis illustratespotential strengths and weaknesses of each technique. By comparing the indications of fairunderwriting profit margins under each of these pricing methods, their differences will behighlighted. This will allow both company management and regulators to better gauge thepotential impact on prices of adopting one or another technique in various businessenvironments.The last part summaries the resultes and also serves as a practical guide for applying thesemodels in order to encourage more widespread use of these approaches.