Financial Pricing of Insurance in the Multiple-Line Insurance Company

This paper uses a contingent claims framework to develop a financial pricing model of insurance that overcomes one of the main shortcomings of previous models - the inability to price insurance by line in a multiple line insurer subject to default risk. The model predicts prices will vary across firms depending on firm default risk, but within a given insurer prices should not vary after controlling for line-specific liability growth rates. An important qualification to this result for insurance groups is also analyzed, where several insurer subsidiaries are owned by a primary insurer or holding company.