CAS Exam 9 Spring 2016, Question 23
Study guide: Exam 9
Management is choosing between two new lines of business with the following characteristics:
| Line A | Line B | |
|---|---|---|
| Expected Premium (million) | 6 | 4 |
| Required Capital (million) | 4 | 2 |
| Expense Ratio | 20% | 30% |
| Discounted Loss Ratio | 75% | 65% |
For both lines:
- Investment return is 5%.
- Expenses are paid immediately.
- Losses are paid at the end of the year.
- Capital is released at the end of the year.
Using a risk-adjusted evaluation, determine which line should be pursued by management.
Part a (1.25 points)
Answer this question and see the worked solution