8I New Business Strain

[SleepyBob]

The NBStrain formula has been bothering me for days.

I would say that New Business Strain is when most (or more-than-all) of your FY premium is going towards reserve and req'd capital increases. That said, I have a hard time interpreting NBStrain=DistrEarn(1)/Prem(1) in Atkinson.

1. It seems to me that NBStrain decreases as you tinker with a product to increase its new business strain. You increase reserve requirements, DistrEarn goes down, and NBStrain decreases. Conversely, a product with no expenses and no benefits payable has the highest possible NBStrain (= Prem*(1-tax)/Prem).

2. How do you interpret a value of NBStrain? "Uh oh -- NBStrain=0.5!" Obviously, it has some sort of use as a metric, but I can't figure out how to analyze it. (Unlike ROE, where you can say "Uh oh -- ROE < WACC!")

[NoName]

Not familiar with the specific note, but:

1. I think you're just confused by the sign convention. I agree with you, it seems more natural to say you have positive strain if issuing new business causes negative DEs. But it's six of one, half a dozen of the other.
2. Basically you have to compare it to your free surplus and the amount of sales you want. If strain is 10%, you can't sell $100M in premium unless you have enough free surplus to take a $10M hit.