Ch19: Models (2) Flashcards

1
Q

The NPV profit criterion depends on several assumptions

A
  1. there is a perfectly free and efficient capital market
  2. when two risky investments are compared, each is discounted at a risk discount rate appropriate to its riskiness
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2
Q

Disadvantages of NPV

A
  • subject to the law of diminishing returns
  • it says nothing about competition
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3
Q

Useful measures with NPV

A
  • relative to commission
  • % of PV of premium income (which gives an indication of market share)
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4
Q

When is NPV more reliable than IRR?

A
  • if there is more than one change in sign in the stream of profits in the profit signature, the IRR will not normally be unique
  • NPV can be related to useful indicators of the policy’s worth to the company, in terms of sales effort or market share
  • IRR might not exist if makes profit from outset
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5
Q

Disadvantages of DPP

A
  • often disagrees with NPV as ignores all cashflows after the discounted payback period
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6
Q

Marketability might lead to a reconsideration of

A
  • the design of the product
  • the distribution channel to be used
  • the company’s profit requirement
  • whether to proceed with marketing the product
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7
Q

Disadvantages of writing capital-intensive business

A
  • all other things equal, lower rate of return
  • could lead directly to a problem with supervisory solvency
  • could weaken company’s resilience to fall in value of assets
  • reduce company’s apparent financial strength
  • represents an opportunity cost
  • could lead to unexpected problem with supervisory solvency if company sells much more business than anticipated
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8
Q

EV definition

A

The value of the future profit stream from the company’s existing business together with the value of any net assets separately attributable to shareholders

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9
Q

Two main ways in which the values of the assets and liabilities can be determined:

A
  • supervisory values
  • economic values
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10
Q

What is dynamic solvency testing and why is it used?

A
  • static solvency test will not enable the actuary to assess the company’s ability to withstand future changes in both the external economic environment and the particular experience of the company
  • dynamic solvency test involves the projection of the company’s revenue account and balance sheet forward for a sufficient number of years so that the full effect of any potential risks may become apparent.
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11
Q

Uses of capital

A
  • write new business
  • adopt a less restrictive investment policy
  • smooth surplus distribution
  • reduce the need for reinsurance
  • smooth dividend payments to shareholders
  • allow the company to seize any profitable business opportunities as they present themselves
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