With two co-authors, I have written a paper on the topic of surplus
allocation that is currently under review at the Journal of Risk and
Insurance. For anyone that is interested, a pdf file of the working paper
is available for download from the Center for Risk Management and Insurance
Research at Georgia State University at the following address -
http://rmictr.gsu.edu/ctr/working.htm. The number of the working paper
number is 95-2. The abstract from that paper is below.
Respectfully submitted,
Richard Phillips
Title: FINANCIAL PRICING OF INSURANCE IN
THE MULTIPLE LINE INSURANCE COMPANY
ABSTRACT
This paper uses a contingent claims framework to develop a financial
pricing model of insurance that overcomes one of the main shortcomings of
previous models -- the inability to price insurance by line in a multiple
line insurer subject to default risk. The model predicts that prices will
vary across firms depending upon firm default risk, but within a given
insurer prices should not vary after controlling for line-specific
liability growth rates. We also analyze an important qualification to this
result for insurance groups, where several insurer subsidiaries are owned
by a primary insurer or holding company. Because the owners of the group
have the option to allow individual subsidiaries to fail, insurance groups
with assets and liabilities widely dispersed among subsidiaries are
predicted to command lower prices than otherwise identical insurers where
assets and liabilities are concentrated in one or a few corporate entities.
Empirical tests using data on publicly traded property-liability insurers
support the hypotheses: prices vary across firms depending upon
overall-firm default risk and the concentration of business among
subsidiaries; but within a given firm, prices do not vary by line after
adjusting for line-specific liability growth rates.
Richard D. Phillips
-----------------------------------------------------
Department of Risk Management and Insurance
Georgia State University Work: (404)651-3397
PO Box 4036 Fax: (404)651-4219
Atlanta, GA 30302-4036 E-Mail: rphillips@gsu.edu
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