Premium
The Determination of Fair Profits for the Property‐Liability Insurance Firm
Author(s) -
KRAUS ALAN,
ROSS STEPHEN A.
Publication year - 1982
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1982.tb03594.x
Subject(s) - underwriting , economics , actuarial science , valuation (finance) , liberian dollar , liability , risk premium , liability insurance , insurance policy , financial economics , econometrics , finance
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.