CAS Exam 9 Spring 2014, Question 10

Study guide: Exam 9

Given the following information regarding an insurance company:

Surplus is $65 million.
Annual client retention is 88%.
Premiums are collected and expenses are paid at the beginning of each year.
Losses are paid at the end of each year.
The current target return on surplus follows the formula $k = a + by$ , where $a = 12.0\%$ , $b = 0$ , and $y$ is the risk-free interest rate of 5.0%.

Part a (0.5 points)

Calculate the franchise value of the firm.

Calculate the duration of the franchise value of the firm.

Assume the following are two alternative pricing strategies:

Make a recommendation on which alternative strategy to pursue and support the recommendation with information provided.