The Development of Property-Liability Insurance Pricing Models in the United States 1969-1989

This contribution to the first AFIR Colloquium will summarize the development of insurance pricing models as they have been applied to property-liability (general or non-life) lines in the United States during the period 1969-199. The development is traced through regulatory decisions and academic research rather than through individual company methods of analysis, the latter being proprietary in nature. This review is especially pertinent to an understanding of the relationship of insurance to general financial markets. The major developments in modern financial economics; namely, the Capital Asset Pricing Model (CAPM), Arbitrage Pricing Theory (AT), and Options Pricing Theory (OPT) all have been applied to pricing the insurance contract and will be reviewed. Finally, fundamental issues faced by insurers again in California with the current implementation of Proposition 103 will be discussed as well as prospects for future development.