Application - CAPM in Rate Making

CAPM dictates the return expected on risky investments in a perfectly efficient capital market.

• Major assumptions are frictionless, continuous trading and a single timeframe

The Supreme Court has held that regulated rates must allow the same expected return as an investment of “equivalent risk”.

• Usually calibrated via CAPM

Double taxation of corporate profits are part of the profit measure.

Rate regulation that reflects profits under these approaches require an allocation of Surplus by line and state.

Economic efficiency requires insurers to measure their costs, or else they "push the wrong product".