6.3.McClenahan

• PH should earn some investment income on PH supplied funds
• Profit = P - L - E + inv inc on PH supplied funds
• P should be adjusted to account for only the portion that can be invested in marketable securities

• Easy to interpret
• Does not require the use of allocated surplus to measure expected profitability

Asses wheter the insurers perceive the regulated rate as reasonable by observing (1) composition of residual mkt, (2) # of insr in voluntary mkt (3) degree of product diversification and diversity and innovation