Lecture 5 Flashcards
GO through all examples in lecture 5A
now
how is profit margin calculated?
profit margin = PV(profits) / PV(premiums)
can you compare profit margin across companies?
no, because profit margin is dependent on the assumptions used for discounting
- mortality
- interest
- lapses
therefore, better used as an internal metric (good to compare different products within the company)
profit measures - embedded value
how is embedded value calculated
- discount cash flows at the risk discount rate (a rate considered equal to the market rate on investments of similar risk)
- the resulting present value is the embedded value
T/F: the embedded value cannot be used to compare many different types of investment products
false.
it can, because of the market risk discount rate it uses
how do you calculate NPV?
difference between PV of profits and initial surplus (surplus strain required to issue the policy)
T/F: you can compare NPV across different companies
false, majorly dependent on company specific assumptions
what is IRR?
its the internal rate of return
the discount rate at with the PV(Profits) = 0
- when the PV(future profits) = surplus strain required to issue the policy
T/F: IRR only works for products which require surplus support at issue
true. the cash flows need to change at least once
what is ROE?
RETURN on equity
ratio of profits (for that year) / equity
does ROE stay constant every year?
no cause both the numerator and denominator change every year
what is ROA?
RETURN on assets
ratio of profits / assets dedicated to that line of business
when is ROA most used? does ROA change every year?
for lines of business that generate large amounts of assets (annuities)
yes, changes every year bc both numerator and denominator change
