We see validation of this theoretical result in the present happenings in the industry. Although it is hard to point to outright capital outflow, for the industry still is growing, there are strong signs of capital unrest. The formation of holding companies on the part of insurance companies, the spreading out into mutual funds, the purchasing of credit card companies by certain insurance companies are all signs of dissatisfaction with the present returns allowed by the economics and regulatory structure of the property and liability industry. It is our conclusion that if the property and liability industry offers to American investors lower rates of return for equal risks, it will have an increasingly difficult time in attracting new capital to finance its growth. We do not say that it is neither possible nor desirable to change the present ratemaking scheme. Nor do we take a stand on whether or not investment income per se should be included in the various possible approaches to setting the rates or prices of insurance. We have asked the question whether the present level of profitability could allow for any uncompensated reduction in any component of profitability, for instance the price of insurance. Our answer is that any scheme whose effect is to lower overall industry profitability is not justifiable on the basis that present profitability is excessive. Our findings refute any claim that the present industry profit is excessive. They do not endorse, and should not be interpreted as endorsing, any present or proposed ratemaking method. IRVING H. PLOTKIN ARTHUR D. LITTLE, INC. RATES OF RETURN IN THE PROPERTY AND LIABILITY INSURANCE INDUSTRY: 1955-1967 report to THE NATIONAL ASSOCIATION OF Arthur D.Little, Inc. PREFACE This report presents an extention and widening of the profitability analysis contained in Arthur D. Little's November 1967 report, Prices and Profits in the Property and Liability Insurance Industry. The present study was commissioned by the National Association of Independent Insurers on behalf of their membership. It was conducted by Dr. Irving H. Plotkin and Mrs. Janet L. Cappers of the Arthur D. Little, Inc. staff. The American Insurance Association, sponsors of the original report, concurred with Arthur D. Little using the original report's format in this extention. The exhibits report annual and average rates of return measured by several definitions for the Stock, Mutual, Reciprocal and Lloyds segments as well as for the Total of the property and liability insurance industry. The time period covered is from 1955 through 1967 (which includes the latest data currently available). -ii |