D.05.Robbin
Home > Flashcards > Print Preview
The flashcards below were created by user
Exam9_2012
on
FreezingBlue Flashcards. What would you like to do?

Methods to calculate UW profit provision
 CY Investment Income Offset: adjust U^{0} for inv inc
 PV Offset: adjust U^{0} by comparing to reference line
 CY ROE method: select target ROE
 PVI/PVE: select target PVI/PVE
 PV CF Return: set PV CF = PV chg in equity
 Risk adjusted disc CF: get U from fair premium
 IRR: select target IRR btwn insr & shareholders

+/ of CY methods
 (+) data easily obtained & verified
 (+) insr less likey to make pessimistic projections to incr prof margin
 (+) CY inv yield are relatively stable
 () retrospective => not totally applicable to prospective ratemaking

CY Investment Income Offset Procedure
 adjust U^{0} to account for investment income
 U = U^{0}  i_{AFIT}PHSF
 (+) easy to obtain & vefity nbrs from annual statement
 (+) calculation is short & straightforward
 () lack of economic theory supporting calculation
 () results distorted if large change in vol or res adeq

PV Offset Method
 assumption: U^{0} reflects inv inc from reference line
 choices of rate: historical (stable), new money (prosp)
 U = U^{0}  PLR(PF_{ref}  PV_{line})
 (+) accounts for inv inc in simple manner
 (+) not distored by rapid growth / decline
 (+) no need to select target return or allocate S

CY ROE Method
 select U necessary to achieve target ROE
 (+) data easy to obtain & verify
 (+) roe similar to GAAP ROE used in other industries
 () distorted by large chg in growth / reserve adequacy
 () need to select target ror
 () need to select a leverage ratio

PVI / PVE Method
 select U necessary to set PV return = PVI / PVE
 PVI calculated as of end of first year
 PVE annualized = divide by sum of disc factors
 (+) based on measure of return similar to GAAP ROE
 () need to select disc rate
 () need to select target ror

PV CF Return Model
 select U for PV net CF @ inv ror = PV chg in E @ target ror
 (+) PV uw CF is what most people think about w regards to uw profit
 () not clear what sort of profit is measured

Risk Adjusted discounted CF Model
 calculate a fair premium and derive profit provision
 rules: all CF at time 1; only loss disc a risk adj rate
 P = Loss + Exp + Tax on (PLE) + Tax on ROE
 (+) great intuitive appeal
 (+) grounded in modern financial theory
 (+) not necessary to determine a target ror
 () hard to find beta (for risk adj return)

IRR on Equity Model
 select P to achieve targer return on equity flow
 equity flow = income  chg in S
 (+) similar to rate on loan
 (+) reflects accounting rules via impact on CF
 () need target return
 () need surplus requirement

Questions to consider when creating U model
 Model construction: inc S? how to det S? how to incorporate risk? better to use CF? how to reflect tx?
 Parameter selection: disc rate, target return

2 ways to regulate profit provision
 ror approach: ensure cpies achieve adequate return
 constrained free market: P will move to optimal lvl via mkt forces
 first method compares insr to utility cpy > wrong