Determination of Fair Underwriting Return for Property and Liability Insurance Industry

Abstract

There have been substantial debates and controversies about whether to allow for investment income in setting rates for property and liability insurers. The debate began

at least as early as 1919 when a resolution was introduced at the National Convention of

Insurance Commissioners to determine the extent to which investment income should be

considered in ratemaking. After two years' debate the so-called 1921 Standard Profit Formula was adopted by the NAIC. That formula provided that fire insurers were entitled to a 5 percent underwriting profit and no part of investment income should be

considered in ratemaking process (Webb, 1979). No explanation was given to indicate how the percentage was derived.