Risk-Adjusted Underwriting Performance Measurement

By Yingjie Zhang

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Abstract

To measure economic profits generated by an insurance policy during its lifetime, we compare the terminal assets of the policy account with certain break-even value. The break-even value is an increasing function of the claims risk and the asset investment risk. It can be calculated with closed-form formulas. We study policies with multiyear loss payments and tax payments. Profits from underwriting and from capital investment are measured separately. Relationships between the cost of capital and the risk-adjusted discount rate of loss are derived. Methods developed in this paper are also useful for fair premium calculation.

KEYWORDS: Risk-adjusted performance measure, risk-adjusted discount rate, policy-year profit, cost of capital, EVA, fair premium

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Citation

Zhang, Yingjie, "Risk-Adjusted Underwriting Performance Measurement," Variance 6:2, 2012, pp. 178-195.

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Variance (ISSN 1940-6452) is a peer-reviewed journal published by the Casualty Actuarial Society to disseminate work of interest to casualty actuaries worldwide. The focus of Variance is original practical and theoretical research in casualty actuarial science. Significant survey or similar articles are also considered for publication. Membership in the Casualty Actuarial Society is not a prerequisite for submitting papers to the journal and submissions by non-CAS members is encouraged.