CAS Exam 9 Spring 2013, Question 20
Study guide: Exam 9
Given the following for an insurance policy:
| Item | Value |
|---|---|
| Premium | $500 |
| Expected loss ratio | 70% |
| Expected combined ratio | 105% |
| Investment return of the company | 11% |
| Overall market return | 9% |
| Risk-free interest rate | 6% |
- Taxes are not considered.
- Losses will be paid at the end of the year according to the following pattern:
| Year | Paid |
|---|---|
| Year 1 | 40% |
| Year 2 | 35% |
| Year 3 | 25% |
- Premium and expenses are paid on the effective date of the policy.
Part a (1 point)
Using the risk-free interest rate, calculate the net present value of the underwriting cash flows for this policy.
Part b (0.5 points)
Describe what the net present value calculated in part a. above represents to the insured.
Part c (0.5 points)
The CEO of the company uses the net present value calculated in part a. above to represent the expected profit for this policy. Explain whether the CEO is correct or incorrect.
No current syllabus covers this question; it is kept for the record.
Answer this question and see the worked solution