Exam 9 Practice Question 7
Study guide: Exam 9
An insurer writes two lines of business. Its equity is E = 100. The line liabilities (loss and other reserves) are L_1 = 120 and L_2 = 60, and the premiums are P_1 = 80 and P_2 = 40. The insurer's invested assets equal its equity plus its liabilities, and earn a rate of return of 5%. The underwriting returns, as underwriting profit divided by premium, are r_1 = -2\% and r_2 = +3\%.
Using the model of the insurer's return on equity in Cummins's Allocation of Capital in the Insurance Industry, calculate the insurer's return on equity.
- A) 4.6%
- B) 4.9%
- C) 8.6%
- D) 13.6%
- E) 15.0%
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