The recipients of the 2008 Mehr Award were Richard Phillips, Georgia State University, J. David Cummins, Temple University, and Franklin Allen, University of Pennsylvania, for “Financial Pricing of Insurance in the Multiple-Line Insurance Company,” JRI, December 1998, Vol. 65 #4, pp. 597-636.
This paper uses a contingent claims framework to develop a financial pricing model of insurance that overcomes one of the main shortcomings of previous models — the inability to price insurance by line in a multiple line insurer subject to default risk. The model predicts prices will vary across firms depending upon firm default risk, but within a given insurer prices should not vary after
controlling for line-specific liability growth rates. We also analyze an important qualification to this result for insurance groups, where several insurer subsidiaries are owned by a primary insurer or holding company. Empirical tests using data on publicly traded property-liability insurers support the hypotheses: prices vary across firms depending upon overall-firm default risk and the concentration of business among subsidiaries; but within a given firm, prices do not vary by line after adjusting for line-specific liability growth rates.