Interaction of Total Return Pricing and Asset Management in a Property/Casualty Company

This paper proposes to show that it is not possible for a property-casualty company to price on a total return basis and achieve the targeted return without the aid of a detailed flow of funds statement. It is demonstrated that, for a company to achieve a targeted total rate of return, it is imperative that a company position itself so that funds can be invested at the assumed rate. As part of the demonstration an example of a hypothetical company is presented and the flow of funds constructed and analyzed. Projections of proforma statements of sources and uses of funds are employed to show that a company so situated must pay for “old losses” with “new money,.” Data is presented suggesting that many companies in the industry are positioned in a similar fashion. The cause of the problem is identified and a tentative solution offered. Additional data is compiled from Annual Statements of a sample of companies indicating that assets maturing in a given year are insufficient to meet current payments on losses incurred in prior years. Finally solutions to some of the problems in the area of planning and forecasting are suggested.