A Note on the Gap Between Target and Expected Underwriting Profits [Discussion]

This paper argues that if forecast and actual insurance costs are random variables, then the traditional actuarial ratemaking procedure produces an average underwriting profit margin lower than the target underwriting profit margin. The argument is correct in that the average profit margin, per policy or per book of business, will indeed be lower than the target profit margin. However, the expected total profit margin, for the insurer or for the industry as a whole, will not differ from the target profit margin. Observed differences between target and actual profit margins are due to marketplace competition, random forecasting errors, or unsustainable target margins, not to biases in the ratemaking procedures. The total profit margin for the insurer is the important figure, not the average margin per policy. Keywords: Profit Factor, Rate of Return/Risk