Effect of Serially Autocorrelated Profit Margins on the Solvency of Insurers: The Case with Constant Target Margins Set by the Capital Asset Pricing Model

Abstract

Insurance ratemaking in the modern sense emphasizes the need for prices that are economically or financially appropriate in a competitive market. This emphasis manifests itself through procedures for estimating future costs per policy that are believed to produce unbiased estimates and through the selection of profit loadings that would lead to expected rates of return that are in economic equilibrium. This approach has been taken by Fairley [1979], Hill [1979], Kraus and Ross [1982], Myers and Cohn [1987]. It contrasts with older views, which tended to set the profit loading with the objective of limiting the probability of insolvency, as illustrated by Beard, Pesonen and Pentikainen [1984].