"Adjusted" has same meaning as indicated in previous table and as reported in "Grand TotalsMutual Companies." Over the 27-year period the total approximate amount of "Appreciation" recorded was $918 million; "Depreciation" approximately $423 million; net "Appreciation," therefore, of approximately $495 million. 50 55 NET WORTH AS A PERCENTAGE OF TOTAL NET WORTH AND LIABILITIES MUTUAL COMPANIES 1940-1966 Unadjusted Net Worth (includes appreciation and depreciation) Adjusted Net Worth (excludes appreciation and depreciation) Year NET WORTH AS A PERCENTAGE OF STOCK COMPANIES 1940-1966 Unadjusted Net Worth (includes appreciation and depreciation) Remarks of Irving H. Plotkin Department of Economics Massachusetts Institute of Technology Consultant to Arthur D. Little, Inc. Before the New York Society of Security Analysts February 15, 1968 In his remarks, Mr. Jones has indicated the scope of Arthur D. Little's recently completed study of the property and liability insurance industry. Although primarily concerned with prices and profits, such aspects as the historical development of the industry, regulation and competition in the industry, efficiency of production and the quality of the insurance product were closely examined. At this time, I would like to address myself to the part of the study which was both the central issue we examined and the part which probably most concerns you gentlemen. The central issue of the report is concerned with prices, profits, and investment income. To analyze and arrive at conclusions about the role that investment income might possibly play in price setting, it was necessary for Arthur D. Little to develop certain definitions and methodologies by which overall income could accurately be measured, rates of return calculated, and comparisons be made between the property and liability insurance industry and the other industries of our economy. One might view our work as being a demurrer to the charge that investment income should be included in rate making. Without agreeing on a philosophical level with those who claim that investment income "belongs" to the policyholders in fact without involving ourselves in the unresolved arguments about the ownership of assets and income streams at all we ask the question whether the present level of total profitability in the property and liability insurance industry can allow for any significant reduction in the prices presently being charged for the insurance product. We asked this question from a socio-economic point of view and our answers are based on comparisons between alternative uses of capital available in the economy. Accordingly, the total profitability of the property and liability insurance industry was compared with the broad spectrum of American industry. - As you gentlemen well know, should profitability in any industry fall too low, capital, and therefore capacity, will leave that industry to seek more profitable employment elsewhere. However, this basic economic law does not at all imply that all industries, even in equilibrium, should experience the same average rate of return. Were that the case, our task would indeed be simple. We could take the approach sometimes followed by the FTC or Justice Department and rank industries according to profitability with the implication that the ones at the top of the list are too profitable, and the ones at the bottom of the list are in need of aid. This makes very little economic sense. Such reasoning implies that Government bonds and uranium stocks should both hold out the same prospective rate of return to investors. This simplistic approach ignores the important element listing of risk as it enters into all investment decisions. Therefore, before we can determine whether a reduction in the profitability of the property and liability insurance industry would be likely to lead to a capital outflow for that industry, we must know what alternative earnings are available for capital placed at similar risks within our economy. Accordingly, our study had as a principal task the construction of a quantified risk/return pattern for the American economy, a pattern capable of differentiating and evaluating the risk/return positions of various industries. Both Two problems of definitions arise immediately. For comparisons to be made we need a definition of return and a definition of risk. of these items must be defined in a way which can be meaningfully and unbiasedly applied to a large number of diverse economic activities. 39-280 071 pt. 17A - 26 |