CAS Exam 9 Spring 2015, Question 23
Study guide: Exam 9
A consulting actuary has been tasked with evaluating a stock company's methodology for selecting an appropriate underwriting profit provision. Company management has historically favored using the Calendar Year Investment Income Offset Method to determine the required profit provision. Increased awareness of the changing macroeconomic environment and stronger regulatory oversight has prompted management to place greater emphasis on reflecting risk within the model. Information on the company's historical profile is provided below.
| Calendar Year | Combined Ratio | Earned Premium at Year End | Estimate of Portfolio Yield | Actual Realized Portfolio Yield |
|---|---|---|---|---|
| 2010 | 98% | 50 million | 8% | 4% |
| 2011 | 101% | 53 million | 7% | 11% |
| 2012 | 103% | 72 million | 9% | 5% |
| 2013 | 103% | 90 million | 6% | 9% |
| 2014 | 104% | 105 million | 8% | 5% |
| 2015 | 107% | 120 million | 8% | Not available |
Calendar Year 2015 data reflects company projections for year end results.
Using the current management's viewpoint along with the historical company profile above, discuss three items the actuary should consider in using each of the following alternate methods in the selection of the underwriting profit provision.
Part a (0.75 points)
Present Value Offset Method
Part b (0.75 points)
Calendar Year Return on Equity Method
Part c (0.75 points)
Risk-Adjusted Discounted Cash Flow Model
Part d (0.75 points)
Internal Rate of Return on Equity Flow Model
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