Exam 9 Practice Question 8
Study guide: Exam 9
An insurer sets the underwriting profit target for the insurance policies of one line on a risk-adjusted basis, using the insurance CAPM from Cummins's Allocation of Capital in the Insurance Industry, as corrected by the CAS Exam 9 Working Group's January 2026 note. For this line:
- Liabilities to equity:
k_i = 0.75 - Premium to equity:
s_i = 0.50 - Underwriting beta:
\beta_i = 0.20 - Risk-free rate:
r_F = 4\% - Market risk premium:
r_M - r_F = 6\%
Calculate the line's required underwriting return (underwriting profit as a percentage of premium).
- A)
-4.8\% - B)
-1.8\% - C)
-1.5\% - D)
+1.2\% - E)
+7.2\%
Answer this question and see the worked solution