A Synthesis of Property-Liability Insurance Pricing Techniques

Although the standard pricing model of the insurance industry (dating back to the 1921 National Convention of Insurance Commissioners (NCIC) Fire Insurance Committee report) ignores investment income in insurance ratemaking, many insurance pricing models have been proposed that integrate the underwriting and investment income aspects of the insurance contract. These models generally follow one of two distinct paths. Those proposed by insurance practitioners or academics specializing in insurance typically concentrate on the underwriting side of the insurance transaction and select rather arbitrary values for investment income. On the other hand, models developed by financial economists tend to concentrate on the investment aspect of insurance by emphasizing risk adjusted rates of return on investment while glossing over the specialized characteristics of the underwriting side of the insurance business. More recently, research has been aimed at developing pricing models that adequately address the importance of both underwriting and investment-related issues. The purpose of this paper is to compare and contrast the predictive abilities of a number of different insurance pricing models over an extended time period in order to demonstrate how the various models perform under different economic and competitive conditions. It is anticipated that this research will be of assistance to practitioners as well as academics in the application of insurance pricing models and interpretation of results.