Economic profits and underwriting performance are analyzed in insurance policies, indicating effective assessment methods.
To measure economic profits generated by an insurance policy during its lifetime, we compare the terminal assets of the policy account with certain break-even value. The break-even value is an increasing function of the claims risk and the asset investment risk. It can be calculated with closed-form formulas. We study policies with multiyear loss payments and tax payments. Profits from underwriting and from capital investment are measured separately. Relationships between the cost of capital and the risk-adjusted discount rate of loss are derived. Methods developed in the paper are also useful for fair premium calculation.
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Yingjie Zhang (2013) studied this question.
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