Capital Requirements for Entry into Property and Liability Underwriting: An Empirical Examination

Regulation of insurers has focused primarily on insurer solidity.1 The concern for solidity centers on safe capitalization requirements for insurers, premium rate adequacy, and investment controls. Although current regulatory concerns frequently address issues of pricing equity and new approaches to risk classification, solidity remains the principal consideration. Capital adequacy, a key solidity requisite, has generally been addressed from a context of rules-of-thumb and general conservatism. Questions of capital adequacy are relatively complex and analysis of risk theory and finance has been difficult to translate into statutes and difficult for insurance commissiohers to incorporate into regulatory practice. Rule.of-thumb analysis, therefore, has held considerable appeal for insurance commissioners. In recent years, research into the capital adequacy of established insurers has expanded considerably. Aside from the long-standing conceptual contributions of risk theory, advances were stimulated greatly by the linking of portfolio theory to the risk and return analysis of different lines of insurance.2 The most thorough explanation is the work of Bachman, who employed the optimization features of the portfolio model to estimate minimum capital requirements