University of British Columbia and Yale University, respectively.
The Determination of Fair Profits for the Property-Liability Insurance Firm
Article first published online: 30 APR 2012
1982 The American Finance Association
The Journal of Finance
Volume 37, Issue 4, pages 1015–1028, September 1982
How to Cite
KRAUS, A. and ROSS, S. A. (1982), The Determination of Fair Profits for the Property-Liability Insurance Firm. The Journal of Finance, 37: 1015–1028. doi: 10.1111/j.1540-6261.1982.tb03594.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
Single period and dynamic valuation models in continuous time, under certainty and uncertainty, are developed for a property-liability insurance contract to determine the “fair” (competitive) premium and underwriting profit. The intertemporal stochastic model assumes that the claim frequency and the price index of claim settlements are functions of a set of underlying state variables which follow a multivariate Wiener process. The competitive premium is shown to be proportional to the claim frequency and the price index for claim settlements at the time the policy is issued. The factor of proportionality varies directly with the claim settlement rate and the length of coverage, and inversely with the risk-adjusted real interest rate on the dollar-valued claim rate.