Pricing and Capital Allocation for Multiline Insurance Firms |
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| Authors: | Rustam Ibragimov Dwight Jaffee Johan Walden |
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| Affiliation: | Rustam Ibragimov is in the Department of Economics, Harvard University. Dwight Jaffee and Johan Walden are in the Haas School of Business, University of California at Berkeley. The authors can be contacted via e‐mail: ribragim@fas.harvard.edu, jaffee@haas.berkeley.edu, and walden@haas.berkeley.edu, respectively. We are grateful to the referee for helpful suggestions. Ibragimov gratefully acknowledges partial research support by the NSF grant SES‐0820124. |
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| Abstract: | We study multiline insurance companies with limited liability. Insurance premiums are determined by no‐arbitrage principles. The results are developed under the realistic assumption that the losses created by insurer default are allocated among policyholders following an ex post, pro rata, sharing rule. In general, the ratio of default costs to expected claims, and thus the ratio of premiums to expected claims, vary across insurance lines. Moreover, capital and related costs are allocated across lines in proportion to each line's share of a digital default option on the insurer. Our results expand and generalize those derived elsewhere in the literature. |
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