Exam 9 Practice Question 4
Study guide: Exam 9
In a one-period model with no expenses, taxes or investment income, a portfolio has expected loss L, premium P and margin M = P - L, and is supported by assets a funded by premium and investor capital Q = a - P.
Determine which of the following statements about the insurance margin are true.
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I. Holding expected loss and assets fixed, a higher required return on capital raises the margin and reduces the capital investors contribute.
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II. The margin as a percentage of premium equals one minus the loss ratio.
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III. Two portfolios with the same margin as a percentage of premium earn the same return on capital.
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A) I only
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B) I and II only
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C) I and III only
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D) II and III only
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E) The answer is not given by (A), (B), (C), or (D)
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