Premium
Price Regulation in Property‐Liability Insurance: A Contingent‐Claims Approach
Author(s) -
DOHERTY NEIL A.,
GARVEN JAMES R.
Publication year - 1986
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.1540-6261.1986.tb02529.x
Subject(s) - actuarial science , portfolio , liability , shareholder , business , asset (computer security) , liability insurance , economics , insurance policy , financial economics , finance , corporate governance , computer security , computer science
ABSTRACT A discrete‐time option‐pricing model is used to derive the “fair” rate of return for the property‐liability insurance firm. The rationale for the use of this model is that the financial claims of shareholders, policyholders, and tax authorities can be modeled as European options written on the income generated by the insurer's asset portfolio. This portfolio consists mostly of traded financial assets and is therefore relatively easy to value. By setting the value of the shareholders' option equal to the initial surplus, an implicit solution for the fair insurance price may be derived. Unlike previous insurance regulatory models, this approach addresses the ruin probability of the insurer, as well as nonlinear tax effects.