B.04.Noris

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Author:
Exam9_2012
ID:
136578
Filename:
B.04.Noris
Updated:
2012-05-09 15:00:40
Tags:
MVS
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Description:
Asset / Liability Management Strategies for P&C Companies
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  1. Mkt value of P&C company
    • pf equity: currently bkd assets - liab
    • franchise equity: value of net income from bus not yet bkd
  2. 3 methods to measure pf equity
    • statutory surplus: using statutory accntg rules
    • current value accntg: mkt value of assets, undisc liab
    • economic accntg, MVS, Mkt Value of Surplus: mkt value of A&L
  3. Managing MVS
    • historically volatile because of LT bds investments
    • not ideal -> MVS is a leading indicator of future bk value
    • mgt should manage volatility of MVS
    • MVS seen as net bd w unusual patterns of +/- CF
  4. Duration of MVS
    • MVS = MVA - MVL
    • DMVS = [DMVA * MVA - DMVL * MVL ] / MVS
    • DGS = DMVS (amt by which MVS varies from zero)
    • Approx Dbond = 1 / i, approx Dstock = 1 / d -> unrealistic
    • DGtrs = DGS - H
  5. Target DGS options
    • holding period return
    • zero: avoid S volatility bcause it restricts amt of P able to write
    • 1: manage annual return on surplus
  6. Economic leverage
    • EL = MVA / MVS
    • should keep constant
    • DGel = DMVS - DMVA -> set to zero
  7. DMVS vs risk
    • still exposed to unexp loss dvpt. Slns include
    • immunize against real ror (using stocks w their disadv)
    • purchase investmt that roll over often (but depart from D match)
    • overstate reserves, ie contingency reserve

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