Estimating the Underwriting Profit Margin of
P&C Insurers Based on the Full-
Information Underwriting Beta
• Underwriting profit margins differ by line of
• Prior research has assumed the only
difference in UW profit margins is due to
differences in the time to loss payouts by
• Current paper uses holding time, adds
expenses, and tax rates as additional
predictors of underwriting profit margins
• 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
• 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
Suggestions for Improvements
Suggestions for Improvement
• Relatively small sample size the declines
at each successive step of the estimation
– Check the model against US data to increase
• 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