Fair Premium Rating Methods and the Relations Between Them

Several well known methods of calculating fair premium rates are considered. Particular reference is made to the Myers-Cohn and internal rate of return methods. In the absence of taxes, the most natural application of each method produces a return on equity, period by period, that is consistent with the capital asset pricing model. Hence, the 2 methods produce the same premium under these conditions. The same result holds in the presence of tax, but only with the addition of further conditions relating to insurer‘s capital structure and rate of release of underwriting profits.