D.05.Robbin

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Exam9_2012
ID:
138964
Filename:
D.05.Robbin
Updated:
2012-05-09 17:12:37
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underwriting profit
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Description:
Thr Underwriting Provision
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  1. 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
  2. +/- 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
  3. CY Investment Income Offset Procedure
    • adjust U0 to account for investment income
    • U = U0 - iAFITPHSF
    • (+) 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
  4. PV Offset Method
    • assumption: U0 reflects inv inc from reference line
    • choices of rate: historical (stable), new money (prosp)
    • U = U0 - PLR(PFref - PVline)
    • (+) accounts for inv inc in simple manner
    • (+) not distored by rapid growth / decline
    • (+) no need to select target return or allocate S
  5. 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
  6. 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
  7. 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
  8. 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)
  9. 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
  10. 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
  11. 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

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