CAS Exam 9 Spring 2016, Question 15
Study guide: Exam 9
Given the following annual information regarding an insurance company:
- Surplus is $400,000.
- Written Premium is $398,352.
- Expenses are $100,000.
- Expected Loss + ALAE is $300,000.
- Risk-free rate is 4%.
- Total Market Value is $657,152.
- Premiums are collected and expenses are paid at the beginning of each year.
- Losses are paid at the end of each year.
Part a (1.25 points)
Assume the company uses a pricing strategy that involves a fixed target return on surplus.
Calculate the assumed client retention rate implied by the market value.
Part b (0.5 points)
Assume the company uses a pricing strategy that varies the target return on surplus (k) according to this formula: k = a + b \times y
where:
a = 8\%b = 1.5
Calculate the assumed client retention rate implied by the market value.
Part c (0.5 points)
Describe which pricing strategy the company is more likely to be using.
Part d (0.5 points)
Calculate the duration of franchise value using the pricing strategy assumptions in part b. above.
Answer this question and see the worked solution