Re: on CAPM model for insurance ratemaking

Klein Annemarie ( Annemarie.Klein@ca.eyi.com )
Fri, 6 Mar 1998 10:32:25 -0600

The CAPM says that as risks become increasingly more volatile,
investors expect a higher rate of return. So, we can draw from this
that if a high rate of return is expected from investors, the risk is
quite volatile. If investors of the insurance company expect a high
rate of return on their investment, then this must be accounted for in
the premiums charged to insureds.

For example, I personally go out and buy shares of ABC Insurance
Company. As an insurance company, ABC has volatile experience {think
of 1991 and Hurricane Andrew's impact on bottom lines!}. I would
expect a higher return on my money than I would if I had purchased
savings bonds. If I didn't expect a higher return, then why would I
invest? My money is "likely" much safer in the bonds.

Now, ABC recognizes that they need to offer this extra incentive to
shareholders, so they must price their products accordingly.

{I believe that this phenomenon is what the paper refers to, and I
don't think it refers to the investments made by the insurance company
which would generate investment income to the company.}

Hope this is helpful.
Anne Marie

zhangg%towers.com@INTERNET
03/06/98 10:57 AM
To: studygroup6%casact.org@INTERNET
cc: (bcc: AnneMarie Klein/ABC/ErnstYoung/CA)
Subject: on CAPM model for insurance ratemaking

I am confused by the CAPM model for insurance ratemaking in Chapter 8
of
"Foundations of C. A. S.". If other terms stay same, then the
underwriting profit
margin increases as the return from the market increases according to
this model.

It's my understanding that if an insurance company can make more money
from stock
and bonds, then they will be required to charge less in underwriting
portion. I think
that's also the point the author tries to say in this Chapter.

Can anyone help me on this? Thanks