D.03.Ferrari

ROE equation
- ROE = ROA x Ins leverage factor + ROS x Ins Exposure
- investors = roe, society = roa, regulators / actuaries = ros
- ROE = ROA + Ins leverage (ROA + int cost on reserve)
Insurance Leverage vs Returns

incr leverage = incr volatility of return
Optimum Capital Structure
- mix of owner's eq & liab which maximizes firm value
- factors affecting firm value = exp earning stream, disc rate
- both those factors affected by mix of owner's eq & liab
- writing more bus (1) incr earning stream (2) incr vol = incr disc
Complications when determining opt cap structure
- high debt = higher risk = creditors demand higher return
- not as easy for insr: possible that high P = better diversification
Uses of Capital Structure
- show public that ocs calls for low R/S ratio -> less insd
- can see if aggressive inv pf driving a low ratio of reserves
ROE variables interact with each other
- incr in P/S = decr in I/A: (1) $ from curr bus not inv (2) risk
- incr in U/P = incr in P/S: can write more bus
- incr in U/P = incr in I/A: can engage in aggressive inv

Author

Exam9_2012

138759

Card Set

D.03.Ferrari

Description

The Relationship of Underwriting, Investment, Leverage, and Exposure to Total Return on Owner's Equity

Updated

2012-05-09T21:05:02Z

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