CAS Exam 9 Spring 2016, Question 26
Study guide: Exam 9
Consider the following formula for the Present Value of Income over Present Value of Equity Model:
PVI/PVE = \frac{\sum_{j=0} INC_j \cdot v_{(m)}^{\,j}}{\sum_{j=1} EQB_j \cdot v_{(m)}^{\,j}}
Part a (0.5 points)
Describe one issue that would arise when switching from an annual frequency model to a quarterly frequency model for computing the underwriting profit provision using the formula above.
Part b (0.75 points)
Identify three rationales for using a pre-tax, risk-free rate for discounting in the numerator.
Part c (1 point)
Suppose there has been a decrease to the discount rate while the positive target return remains constant. Discuss the leverage impact and the resulting change to the underwriting profit provision in the annualized PVI/PVE model.
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