Property-Liability Insurance Pricing Models: An Empirical Evaluation

Over the past two decades, several pricing models that integrate underwriting and investment performance have been proposed or used to determine property-liability insurance rates. In general, these models have been tested separately and only over a relatively limited time horizon. In this article, the major property-liability insurance pricing models are evaluated over the 60-year period from 1926 through 1985 and the results of the various models are compared in terms of the ability to predict actual underwriting profit margins. Differences between model predictions and realized underwriting profit margin series are examined over the entire period as well as various subperiods in order to demonstrate how individual models perform under different conditions. The goal of this research is to assist actuaries and researchers in the application of pricing models and interpretation of results.