TITLE
"Determination of Competitive Underwriting Profit Margins
Using Arbitrage Pricing Theory Model,"
Journal of Insurance Issues, Urrutia, Jorge
L., June 1987, Vol. X, No. 2: 61-77.
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.
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