CAS Exam 9 Spring 2013, Question 15
Study guide: Exam 9
Management is evaluating two potential new lines of business to pursue next year and has developed the following metrics:
| Line A | Line B | |
|---|---|---|
| Expected premium | $9.7 million | $8.3 million |
| Required capital | $9.5 million | $4.5 million |
| Expense ratio | 8.00% | 6.30% |
| Discounted loss ratio | 78.30% | 87.00% |
For both lines:
- Investment return is 6.5%.
- Expenses are paid immediately.
- Capital is released at the end of the year.
- Losses are paid at the end of the year.
- Target risk-adjusted rate of return on capital is 18%.
Propose which line(s), if any, to pursue and discuss how the recommendation will be impacted by available capital.
Part a (2 points)
Answer this question and see the worked solution