Total Rate of Return and the Regulation of Insurance Profits

Beginning In the mid-1960's, Increasing regulatory and scholarly attention has been focused on the insurance rate review process with particular emphasis on the determination of fair profits for Insurance companies. The cumulative effect of these Inquiries has produced a fundamental and sweeping reconsideration by the National Association of Insurance Commissioners (NAIC) and Its members of the principles and practices which since 1921 have dominated rate making in property/liability and other lines of insurance. The extensive scholarly and regulatory investigations produced e wholly new understanding of the economic principles that underlie ell aspects of Insurance price regulation. Areas which heretofore were considered by many regulators, scholars, and the industry as unique and without precedent, were shown to be but specific applications of more general principles of the economics of regulation; questions which had previously been considered within the scope of actuarial science have been shown to require the discipline of financial economics.' This paper seeks to explicate the underlying principles currently being used to assess the propriety of the underwriting profit allowance in insurance rates. As a participant in the reformulation of property/liability rate review principles and in the federal and state examination of these principles (as applied to property/liability, title, end mortgage insurance), the author is especially pleased to have this opportunity to review this body of theory and practice.