Flashcards in Robbin - UW Deck (50)
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1
Total profit (general form)
(Robbin - UW)
total profit = UW gains + investment gains - income taxes
2
Sources of funding that generates investment income (2)
(Robbin - UW)
1. PH supplied funds
2. stockholder supplied funds
3
Components of investment income (4)
(Robbin - UW)
1. interest
2. dividends
3. real estate income
4. realized capital gains
4
Problem with total return approach to developing an UW profit provision
(Robbin - UW)
total returns are measured on a CY basis, which includes impacts from prior year policy writings, vs. ratemaking which uses a prospective PY basis
5
Types of UW profit (5)
(Robbin - UW)
1. UW profit provisions included in manual rates
2. corporate target UW profit provisions (target returns)
3. breakeven US profit provisions that generate expected returns = risk-free return
4. charged UW profit provisions (after experience/schedule modifications)
5. actual UW profits
6
Approaches for regulating insurance profit loads (2)
(Robbin - UW)
1. rate of return regulation
2. constrained free market theory
7
Rate of return regulation
(Robbin - UW)
regulates rates so that insurers receive adequate, but not excessive, total returns
8
Constrained free market theory regulation
(Robbin - UW)
assuming the manual rate is adequate & there is flexibility to deviate from the manual rate, the competitive market should force insurance prices to an optimal level
9
Premium (general formula)
(Robbin - UW)
P = [(1 + c) * L + FX] / [1 - VR - U]
where c = expenses proportional to loss
U = UW profit provision
10
Combined ratio (general formula)
(Robbin - UW)
CR = VR + [(1 + c) * L + FX] / P
where c = expenses proportional to loss
11
Relationship between UW profit provision and the CR
(Robbin - UW)
U = 1 - CR
where U = UW profit provision
12
Methods to determine the UW profit provision (4)
(Robbin - UW)
1. CY investment income offset
2. PV offset
3. PV CF return model
4. risk-adjusted discounted CF model
13
CY investment income offset procedure (description)
(Robbin - UW)
applies an offset to the traditional UW profit provision for investment income as a % of premium
must be iterated until PLR and offset are consistent
14
UW profit provision using the CY investment income offset method
(Robbin - UW)
U = U(0) - after-tax portfolio yield * PHSF %
where U(0) = traditional UW profit provision
and PHSF % = PH supplied funds as a % of premium
15
Choices for handling capital gains for the after-tax portfolio yield in the CY investment income offset method (3)
(Robbin - UW)
1. exclude all capital gains
2. include only realized capital gains
3. include realized & unrealized capital gains
16
After-tax portfolio yield for the CY investment income offset method
(Robbin - UW)
start with ratio of pre-tax investment income / avg. invested assets & apply appropriate tax rates by investment class
select a multi-yr rolling average to increase stability
17
PHSF % for the CY investment income offset method
(Robbin - UW)
PHSF % = PHSF % associated with UPR + PHSF % associated with loss reserves
PHSF % = [UPR * (1 - prepaid acq. %) - prem. reserve] / EP + [PLR * (CY loss reserve / CY incurred losses)]
where UPR = avg. direct UPR
prem reserve = avg. premium receivable
EP = direct EP
18
Prepaid acquisition costs for the PHSF % for the CY investment income offset method
(Robbin - UW)
prepaid acquisition % = commission % + premium tax % + other acquisition % + overhead %
19
Reason that the premium reserve & prepaid acquisition costs are removed from the PHSF associated with UPR for the CY investment income offset method
(Robbin - UW)
these represent funds paid up front/otherwise not available to be invested
20
Sensitivity of PHSF funds associated with loss reserves (3)
(Robbin - UW)
can be distorted by:
1. rapid growth
2. change in loss volume
3. changes in reserve adequacy
best to use a multi-yr average ratio for stability
21
Advantages of the CY investment income offset method (2)
(Robbin - UW)
1. calculations are easily obtained & verified (b/c CY data is used)
2. CY investment portfolio yields tend to be stable
22
Disadvantages of the CY investment income offset method (2)
(Robbin - UW)
1. lacks underlying economic theory
2. subject to distortion from: rapid growth and changes in loss volume or reserve adequacy
23
Present value offset method (description)
(Robbin - UW)
applies an offset to the traditional UW profit provision for the difference b/w PV(loss payment pattern) for a short-tailed reference line & PV(loss payment pattern) for LOB under review
24
UW profit provision using the PV offset method
(Robbin - UW)
U = U(0) - DELPVLR
where U(0) = traditional UW profit provision
25
Difference b/w PV(losses) for the reference line & line under review (DELPVLR)
(Robbin - UW)
DELPVLR = PLR * (PV(loss payment pattern for reference line) - PV(loss payment pattern for LOB))
PLR = permissible loss ratio
26
Premium formula for the PV offset method
(Robbin - UW)
P = [L * PV(loss payment pattern for LOB) + FX + L * (1 - PV(loss payment pattern for reference line))] / (1 - VER - U(0))
27
Critical assumption for the PV offset method
(Robbin - UW)
interest rate used
28
Choices of interest rate for the PV offset method (3)
(Robbin - UW)
1. portfolio yield from a recent yr or an estimate for prospective period
2. current embedded portfolio yield
3. new money yield
29
Portfolio yields vs. new money rates for the PV offset method
(Robbin - UW)
portfolio yields - more stable & easily verifiable
new money rates - consistent with ratemaking's prospective view
30
