CAS Exam 9 Spring 2014, Question 18
Study guide: Exam 9
Assume the following for a publicly traded personal lines insurance company:
- Premium is $125,000,000.
- Expense ratio is 28%.
- Premium is collected and expenses are paid at policy inception.
- Loss ratio is 75%.
- 75% of losses are paid at the end of the first year; the remainder at the end of the second year.
- The company allocates surplus to maintain a 3:2 undiscounted loss reserve to surplus ratio.
- Cost of capital is 7%.
- Investment yield is 4%.
- Risk-free rate is 3.5%.
Part a (2.5 points)
Calculate the internal rate of return.
Part b (0.5 points)
Discuss the adequacy of the rates from the perspective of equity providers.
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