5.8.Panning

Firm accounting value
- Assets currenlty held - reported existing liabilities
- Fails to reflect current economic value of liabilities
- Does not take into account franchise value
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
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))
2 issues when trying to minimize duration of franchise value
- The larger F, the more problematic
- Because F is ìnvisible, strategies to manage D_F appear to increase overall risk
Using pricing to manage D_T

Since k = a + by, can obtain the same k w/ diff weights in a and b. When a decreases, D_F decreases as well

Author

Exam9

67475

Card Set

5.8.Panning

Description

Panning

Updated

2011-02-19T20:28:49Z

Show Answers