6.4.Robbin

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Exam9
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6.4.Robbin
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2011-02-22 22:16:54
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Robbin
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Robbin
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  1. 3 categories of methods for determining UW PM
    • Investment Income offset: start w/ U0, adjust to account for investment income
    • Target Total return income: seek to ensure that the pricing will lead to a target expected total SH return
    • Cash Flow methods: relies on actual premium, losses, expenses, and tax cash flows
  2. 7 methods for determining UW PM
    • Calendar Year Investment offset
    • Present Value offset
    • Calendar year ROE
    • IRR on equity flow
    • PVI / PVE
    • PV Cash flow return
    • Risk-adjusted discounted cash flow
  3. UW PM: Calendar Year investment income offset
    • U = U0 - iAT(PHSF)
    • PHSF = UEPR + L&LAE reserves
    • UEPR = UEPR net of prepaid exp - P receivables
    • L&LAE reserves = LR * (Loss reserves/Inc loss)
    • + simple to implement using readily available data; results are relatively stable
    • - stability issue when rapid growth or decline in vol
  4. UW PM: Present Value offset
    • P = [L + EXP - L{PV(X0) - PV(X)}] / (1 - U0)
    • U = U0 - PLR[PV(X0) - PV(X)]
    • + simple, does not rely on historical ratio, avoids having to select a target return
    • - stability issue when rapid growth or decline in vol
  5. UW PM: Calendar Year ROE
    • ROE = (U - P + II - FIT) / EQ
    • Set target and solve for U
    • + most of the input is readily obtained from rptd financial statments
    • - subject to distortion during periods of growth; requires a target ROE and a P/S ratio
  6. UW PM: IRR on Equity Flow
    • Track the equity flow that would occur had we set up a company to write a single policy, and set it equal to initial investment
    • 0 = ∑ [INCj + SCHNGj] / (1 + IRR)j
    • + simple to interpret; captures impact of accounting rules on SH
    • - need assumption about surplus; target IRR required
  7. UW PM: PVI / PVE
    • Ratio is interpreted as rate of return and used to compare against target
    • PVI = (1 + i)∑j=0 (INCj)vj
    • PVE = ∑j-1 (EQBj)vj-1 / ∑j=1 vj-1
    • + not distorted by historical; balance sheet growth rates; somewhat comparable to GAAP ROE
    • - requires a selection of discount rates
  8. UW PM: PV Cash Flow return
    • PV(∆EQ; r) = PV(TCF; i)
    • + appealing focus on PV(UW CF)
    • - no easy way to reconcile to a GAAP ROE measure
  9. UW PM: Risk-adjusted discounted CF Method
    • PV(P; if) = PV(L; ir) + PV(FX; if) + t * PV(Inv Inc on surplus) * (1 - t)-1
    • ir = if + β(im - if)
    • + somewhat solid theoretical foundation; don't need target return
    • - uncertainty in estimating liability β

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