The Implications of Market Return Pricing Strategies Upon Profit and Required Surplus

As the length, amplitude and overall uncertainty of the underwriting cycle increases, firm profit and required surplus levels become less predictable. Actuarial pricing techniques commonly target expected returns which are impossible to achieve in the soft market. Market based pricing strategies which will maximize return over the entire cycle are not well understood. Extreme approaches have been taken in the past such as holding exposure levels constant or fixing price regardless of the long-term cost to profit or size of book. These strategies have not proved optimal. This paper attempts to determine the strategies which will accomplish various firm profitability goals for a model insurance economy subject to an underwriting cycle. These strategies are then examined with and without practical constraints on price growth, exposure growth, and surplus limitations to compare profits and require surplus levels. Selection criteria for ideal strategies are presented. Finally, ideal strategies are selected corresponding to different types of profitability goals. Reinsurance Research - Risk Loads/Profitability