Discussion Estimating the Underwriting Profit Margin of P&C Insurers Based on the Full- Information Underwriting Beta August, 2007 Overview • Underwriting profit margins differ by line of business • Prior research has assumed the only difference in UW profit margins is due to differences in the time to loss payouts by line. • Current paper uses holding time, adds expenses, and tax rates as additional predictors of underwriting profit margins Methodology • Step 1: Calculate firm level underwriting beta by time series using CAPM model. – Dependent variable = underwriting profit margin • = (1-CR) – 1991-2005, some firms have only 8 years of data. • Step 2: Use Step 1 to calculate by-line underwriting betas by cross-section regression where Bi = estimated coefficient for line of business share. Methodology • Step 3: Use results from Step 2 to estimate fair underwriting profit margins by line, controlling for holding periods, tax and expense rates. • Find significant differences in underwriting beta by line and fair underwriting profit by line. Suggestions for Improvements Table 1 Suggestions for Improvement • Relatively small sample size the declines at each successive step of the estimation – Check the model against US data to increase sample size. • Clarify contributions of the paper. – Not clear what the marginal improvement is to adding taxes and expenses in underwriting profit margin estimations as compared to prior research.
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