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Methods to calculate UW profit provision
CY Investment Income Offset
: adjust U
0
for inv inc
PV Offset
: adjust U
0
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 U
0
to account for investment income
U = U
0
- i
AFIT
PHSF
(+)
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
: U
0
reflects inv inc from reference line
choices of rate
: historical (stable), new money (prosp)
U = U
0
- 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
ID
138964
Card Set
D.05.Robbin
Description
Thr Underwriting Provision
Updated
2012-05-09T21:12:37Z
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