The Development of Property-Liability Insurance Pricing Models in the United States (1st AFIR International Colloquium, 4/90)

This is a useful history of the regulatory debate and the financial models that have played a role in it, with an emphasis on the Massachusetts debate, which has acted as a crucible in the forging of new theoretical approaches. The author has also helped to organize several annual conferences on risk-related topics which have produced volumes of proceedings. Abstract: 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 1969-1989. This 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 (APT), 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. Keywords: Investment Income, Profit Factor, Rate of Return, Risk, Regulation