Calculate Profit Margin

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					              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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