5.8.Panning

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Author:
Exam9
ID:
67475
Filename:
5.8.Panning
Updated:
2011-02-19 15:28:49
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Panning
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Panning
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  1. Firm accounting value
    • Assets currenlty held - reported existing liabilities
    • Fails to reflect current economic value of liabilities
    • Does not take into account franchise value
  2. 3 facts about franchise value
    • Significant for many P&C insurers (at least one third of total value)
    • Exposed to interest rate risk (since F = PF of future renewals)
    • Often unmeasured, unreported, unmanaged
  3. Panning franchise value model
    • Pricing
    • P - L - E + (S + P - E)y = kS
    • Franchise
    • F = [P - E - L/(1 + y)]*[d / (1 - d)]
    • d = cr / (1 + y)
    • Pricing strategy
    • k = a + by
    • F = cr*S*(a + (b - 1)y) / ((1+ y)(1 + y - cr))
    • D = (a - b + 1)/((1 + y)(a + by - y)) + 1/(1 + y - cr))
  4. 2 issues when trying to minimize duration of franchise value
    • The larger F, the more problematic
    • Because F is ìnvisible, strategies to manage DF appear to increase overall risk
  5. Using pricing to manage DT
    Since k = a + by, can obtain the same k w/ diff weights in a and b. When a decreases, DF decreases as well

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