Abstract
Property—liability insurance contracts are characterized by a time lag between the premium payment and loss settlement dates. During this time lag, the insurance company earns investment income on the unexpended component of the premium. Given this timing difference, it is surprising that the recognition of investment income in ratemaking is a relatively recent phenomenon. Prior to the late 1960s, property—liability ratemaking formulas reflected a profit margin that was a flat percentage of the gross premium (usually 5%). The timing difference between premiums and claims and the resulting investment income were ignored in formal ratemaking procedures.
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