Ch19: Models (2) Flashcards
1
Q
The NPV profit criterion depends on several assumptions
A
- there is a perfectly free and efficient capital market
- when two risky investments are compared, each is discounted at a risk discount rate appropriate to its riskiness
2
Q
Disadvantages of NPV
A
- subject to the law of diminishing returns
- it says nothing about competition
3
Q
Useful measures with NPV
A
- relative to commission
- % of PV of premium income (which gives an indication of market share)
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
5
Q
Disadvantages of DPP
A
- often disagrees with NPV as ignores all cashflows after the discounted payback period
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
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
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
9
Q
Two main ways in which the values of the assets and liabilities can be determined:
A
- supervisory values
- economic values
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.
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