CAS Exam 9 Spring 2017, Question 12
Study guide: Exam 9
Part a (1.25 points)
An insurance company writes 100 identical policies for a particular line of business. Given the following information for each policy:
| Premium | $1,500 |
| Expenses | $250 |
| Losses | $1,100 |
- The risk-free rate is 5%.
- Premium is collected and expenses are paid at the beginning of each policy year.
- Losses are paid at the end of each policy year.
- The client retention percentage is 90% in the first policy year and 80% in each subsequent policy year.
Calculate the insurer's franchise value.
Part b (1 point)
Describe two aspects of the practical dilemma associated with managing franchise value.
Part c (0.75 points)
Outline a proposed solution to the practical dilemma of managing franchise value and discuss how it addresses each aspect of the practical dilemma in part b. above.
Answer this question and see the worked solution