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Problems w benchmark leverage ratio
- not all risks are related the same to P (cr risk, inv risk)
- ignores past reserving exposure
- each insr has unique amt of S dependant on risk exposure
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2 meaningful measures of S
- req S of insurance group
- req marginal S for a specific chg in A/L/P
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Income definition & rate of return
- annual incr in net worth of business from actual ops
- Inc = chg in S + div - paid in capital
- ror = dS/S; independant of S defn (GAAP, Stat)
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Fair & reasonable return
- similar to other cpies w similar risk
- sufficient to attract capital
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Rate of return adequacy
- ad if industry attracts capital
- ad if new cpies are being formed
- inad if div > capital inflow
- inad if cpies are leaving the market
- regulation only requires opportunity to earn reasonable return
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Mutual vs Stock insurers
- mutual: provide availability of insurance
- stock more insolvency: more focused on comm, high leverage
- need to incr S to fund: (1) exp & clm infl (2) incr in aggregate res (3) incr in demand for ins (4) div (stock)
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Why return on book is fair?
- ratio of mkt to bk roughly same benchmark from all ind
- actual return on bk value close to required ror
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