D.01.McClenahan

Card Set Information

Author:
Exam9_2012
ID:
138527
Filename:
D.01.McClenahan
Updated:
2012-05-09 16:57:49
Tags:
Opportunity ROE ROS
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Description:
Insurance Profitability
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  1. 2 ways to measure insr results
    • profits: absolute $ nbr; used to pay div or grow cpy; used by investors and mgt (-) hard to compare
    • ror: profit / base (equity, asset, sales); measure of efficiency (+) can be used to compare; used by regulators (propective)
  2. Factors influencing opportunity cost
    • LOB: long tail lines imply more inv income
    • Infrastructure: no cr for ph (comes from prior pol)
  3. Opportunity cost
    • lost inv inc for ph bcause prem paid ahead of loss
    • always calculated @ rf: ph not exposed to any risk
    • only on ph supplied funds (eg. surplus = from owners)
    • does not equal exp $ profit to be earned by insr
  4. ROE
    • compares profit of insr to owner's investment
    • (-) forces regulators to focus on roe instead of rate equity
    • (-) S needs to be alloc -> artificial, 100% S behind each risk
    • (-) regulators use target P/S ratio -> regulation on sales
    • ROS (+) similar to markup (+) no P/S -> rate equity
  5. How regulators see if ror not reasonable
    • incr in size of residual market
    • decr in product diversity
    • reduced innovation
  6. Uncertainty of profitability
    • unlike other industries, need yrs of devpt to determine profit
    • can play w profits w reserves -> will be reversed
    • current UW results = current reserving + amortization of past

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