Robbin UW

Question 1

Calendar Year Investment Offset Method Formula

Answer 1

U = Uo – PHSF x iafit where:

Uo = traditional underwriting profit

PHSF = (UEPR x(1 – Prepaid Acq Exp%) – Avg Prem Recv) / EP + PLR x (CY Resv / CY IncLoss)

iafit = Inv Income (1 – tax%) / Avg Assets

Reiterate with PLRt = PLRt-1 - (Ut - Ut-1)

Reduces the traditional profit provision for the effect of CY investment income.

Question 2

Calendar Year Investment Offset Method Advantages/Disadvantages

Answer 2

Advantages:

• Practical: CY figures are easily obtainable and verified.
• Calculation is short and reasoning isn’t complex.

Disadvantages:

• Lacks underlying economic theory supporting the method.
• May be distorted by rapid growth (or decline) in loss volume or changes in reserve adequacy.
• Relies on selection of traditional profit load.

Question 3

Why should the Calendar Year Investment Offset Method be reiterative?

Answer 3

Since the profit is an input in the PLR, we can restate the PLR for the updated profit provision and recalculate the profit provision. We can do this iteratively until we get the final underwriting profit provision.

Question 4

Present Value Offset Method Formula

Answer 4

U = Uo - PLR x (PV(Xref) - PV(Xnew)) where

PV(X) = Summation of x% / (1 + i)^t

Question 5

Present Value Offset Method Advantages/Disadvantages

Answer 5

Advantages:

• Not distorted by rapid growth or decline.
• Don’t need to select a target return or surplus requirement.

Disadvantages:

• Relies on selection of traditional profit load.
• Need to determine appropriate discount rate.

Question 6

Present Value Offset Method Alternative Discount Rates

Answer 6

New Money Yield

• Adv: Prospective, theoretically preferable
• Dis: Less stable

Portfolio Yield from Recent Year

• Adv: Verifiable
• Dis: Not Prospective

Estimate of Yield for the Year Rates will be in Effect

• Adv: Prospective
• Dis: Not verifiable

Current Embedded Portfolio Yield

• Adv: Verifiable
• Dis: Not prospective

Question 7

Present Value Cash Flow Return Method Formulas

Answer 7

PV(Chg. Equity; r) = PV( TCF; i) where

TCFt = (Premt - Losst - Expensest + InvIncomet) x (1 - tax%)

Discount everything to t = 0

Question 8

Present Value Cash Flow Return Advantages/Disadvantages

Answer 8

Advantages:
- The present value of underwriting cash flows is what people think of when measuring the underwriting profit.

Disadvantages:

• It’s unclear exactly what type of profit is being measured.
• Difficult to reconcile.
• Not GAAP friendly.
• Requires allocation of surplus and estimate of future equity flows.

Question 9

Combined Ratio Reminder

Answer 9

CR = 1 - U/P

CR = VR + (Loss + FX) / P

Question 10

Risk-Adjusted Discounted Cash Flow Model Formula

Answer 10

PV(FITuw) = [PV(Prem) - PV(Loss) - PV(Expenses)] x tax%

PV(Prem) = PV(Loss) + PV(Expenses) + PV(FITuw) + PV(FITii)

Discount everything to t = 1, prem and exp at risk free, losses at risk adjusted

If possible calculate PV of cashflows in one column (including Inv Income). Then you can calculate PV(FIT) = PV(CashFlows) x tax%

Question 11

Risk-Adjusted Discounted Cash Flow Model Advantages/Disadvantages

Answer 11

Advantages:

• Great intuitive appeal.
• Grounded in modern financial theory.
• Doesn’t rely on a target rate of return.

Disadvantages:
- It’s difficult to estimate an appropriate liability beta.

Question 12

Five types of UW profit

Answer 12

1) UW profit provisions - included in manual rates and in rate filings,
2) Corporate target - requested by management, yield similar to alternative investments of similar risk.
3) Breakeven - generate return equal to the risk free rate.
4) Charged - is obtained by applying experience, schedule rating mods, and other adjustments to the manual rate.
5) Actual UW profit.