D.05.Robbin

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Methods to calculate UW profit provision
- CY Investment Income Offset: adjust U⁰ for inv inc
- PV Offset: adjust U⁰ 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 U⁰ to account for investment income
- U = U⁰ - i_AFITPHSF
- (+) 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: U⁰ reflects inv inc from reference line
- choices of rate: historical (stable), new money (prosp)
- U = U⁰ - 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 (P-L-E) + 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

Author

Exam9_2012

138964

Card Set

D.05.Robbin

Description

Thr Underwriting Provision

Updated

2012-05-09T21:12:37Z

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