UBC Theses and Dissertations
Analysis of the marginal cost of writing automobile insurance Janssen, Hubertus Anna Nicholas
The Royal Commission on Automobile Insurance of British Columbia was established in 1966 to enquire, among other things, into the cost of providing automobile insurance by insurers to the public. This thesis is concerned with evaluating the cost of writing automobile insurance in Canada, and how this cost affects the rate making policies of the Canadian Underwriters' Association, and finally, as to the influence of the cost factor in establishing a centralized agency. In establishing a gross premium, the insurer must cover expected losses arising out of claims and cover administrative costs. Detailed accounts are kept of claims incurred by line of Insurance. However, for the expense portion only direct claims expenses are allocated by line of insurance; no accounts by line of insurance are kept for the rest of the administrative expenses. Expense accounts are submitted annually to the Superintendent of Insurance, but are not broken down by line of insurance. By using multiple regression analysis on cross sectional data for one calendar year, one can estimate the marginal costs of writing different lines of insurance. The hypothesis will be that expenses can be expressed as a linear function of premiums written by line of Insurance. In addition, it will be possible to determine whether any economies of scale are present in writing automobile insurance. The results of the statistical study indicated that the marginal cost or writing automobile insurance was between 28 and 30 percent or the gross premium, which is lower than the 33 percent expense factor currently used by the Canadian Underwriters' Association. In addition no economies of scale were found in writing automobile insurance in Canada.