CAS Exam 9 Spring 2016, Question 25
Study guide: Exam 9
Given the following information about insurance companies A and B:
Company A
| Item | Value |
|---|---|
| Investment gain or loss (after appropriate tax charge) | 5% |
| Premium-to-Surplus ratio | 0.5 |
| Underwriting profit or loss as a percentage of premium | 2.4% |
| Reserves-to-Surplus ratio | 0.2 |
Company B
| Item | Value |
|---|---|
| Investment gain or loss (after appropriate tax charge) | 5% |
| Underwriting profit or loss (after appropriate tax charge) | $6 |
| Capital, surplus, and equity in unearned premium reserves | $500 |
| Reserves and other liabilities (excluding equity in unearned premium reserves) | $200 |
Part a (1 point)
Calculate the return on owners' equity for each company.
Part b (0.5 points)
Briefly describe the "interest" that an insurer pays for the use of reserve capital and contrast this with the interest a financial institution pays for debt capital.
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