Risk-Adjusted Underwriting Performance Measurement
By Yingjie Zhang
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
CitationZhang, Yingjie, "Risk-Adjusted Underwriting Performance Measurement," Variance 6:2, 2012, pp. 178-195.
- Financial and Statistical Methods > Risk Pricing and Risk Evaluation Models > Capital Theory
- Actuarial Applications and Methodologies > Valuation > Discount Rates
- Actuarial Applications and Methodologies > Valuation > Economic Value Added
- Actuarial Applications and Methodologies > Valuation > Financial Performance Measurement
- Financial and Statistical Methods > Risk Pricing and Risk Evaluation Models > Traditional Risk Load (Profit Margin)