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D.03.Ferrari
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ROE equation
ROE = ROA x
Ins leverage
factor + ROS x
Ins
Exposure
investors
= roe,
society
= roa,
regulators / actuaries
= ros
ROE = ROA + Ins leverage (ROA + int cost on reserve)
Insurance Leverage vs Returns
incr leverage = incr volatility of return
Optimum Capital Structure
mix of owner's eq & liab which maximizes firm value
factors affecting firm value = exp earning stream, disc rate
both those factors affected by mix of owner's eq & liab
writing more bus
(1)
incr earning stream
(2)
incr vol = incr disc
Complications when determining opt cap structure
high debt = higher risk = creditors demand higher return
not as easy for insr
: possible that high P = better diversification
Uses of Capital Structure
show public that ocs calls for low R/S ratio -> less insd
can see if aggressive inv pf driving a low ratio of reserves
ROE variables interact with each other
incr in P/S = decr in I/A
:
(1)
$ from curr bus not inv
(2)
risk
incr in U/P = incr in P/S
: can write more bus
incr in U/P = incr in I/A
: can engage in aggressive inv
Author
Exam9_2012
ID
138759
Card Set
D.03.Ferrari
Description
The Relationship of Underwriting, Investment, Leverage, and Exposure to Total Return on Owner's Equity
Updated
2012-05-09T21:05:02Z
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