Exam 9 Practice Question 5
Study guide: Exam 9
An insurer prices two lines in a one-period model with no expenses, taxes or investment income. Capital has been allocated to each line.
| Line A (personal auto) | Line B (property catastrophe) | |
|---|---|---|
| Premium | 100 | 50 |
| Expected loss | 92 | 30 |
| Allocated capital | 40 | 160 |
Which of the following conclusions is best supported?
- A) Line B is the more profitable line, because its margin ratio of 40% is five times line A's margin ratio of 8%.
- B) Line B earns the higher return on capital, because it produces the larger margin in dollars, 20 against 8.
- C) The returns cannot be ranked from these figures, because return depends on the assets supporting each line, which are not given.
- D) Line A earns the higher return on capital, because its premium-to-capital leverage more than offsets its thinner margin ratio.
- E) Line B earns the higher return on capital, because return equals the margin ratio divided by premium-to-capital leverage.
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