Financial Pricing of Insurance in Multiple Line Insurance Companies

96-09

Posted: 25 Jun 1998

See all articles by Richard D. Phillips

Richard D. Phillips

Georgia State University - Risk Management & Insurance Department

J David Cummins

Temple University - Risk Management & Insurance & Actuarial Science

Franklin Allen

Imperial College London

Date Written: March 1996

Abstract

This paper develops a financial pricing model to determine prices by line of business in a multiple line insurer subject to default risk. The model implies that it is not appropriate to allocate equity capital by line; rather, the price in a given line depends upon the overall default risk of the firm. Thus, prices should not vary by line within a given insurer after controlling for line-specific liability growth rates. This result is modified somewhat for groups of insurers under common ownership. Corporation law gives the owners of the group the option to allow individual subsidiaries to fail, and claimants against the subsidiary cannot reach the assets of other group members unless they succeed in "piercing the corporate veil." Thus, insurers that concentrate their business in one or a few corporate entities are predicted to command higher prices than otherwise similar insurers where business is widely dispersed among group members. Empirical tests based 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.

JEL Classification: G22, G32

Suggested Citation

Phillips, Richard D. and Cummins, J. David and Allen, Franklin, Financial Pricing of Insurance in Multiple Line Insurance Companies (March 1996). 96-09, Available at SSRN: https://ssrn.com/abstract=7449

Richard D. Phillips

Georgia State University - Risk Management & Insurance Department ( email )

P.O. Box 4036
Atlanta, GA 30303
United States
404-413-7009 (Phone)

HOME PAGE: http://robinson.gsu.edu/profile/richard-d-phillips/

J. David Cummins (Contact Author)

Temple University - Risk Management & Insurance & Actuarial Science ( email )

Fox School of Business and Management
1801 Liacouras Walk.
Philadelphia, PA 19122
United States
215-204-8468 (Phone)
215-204-4712 (Fax)

Franklin Allen

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

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