Thread: Fall 2009 #7
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Old 04-19-2012, 09:58 AM
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The cost of capital percentages are not used because capital is reflected instead as the equity in the ROE calculation. So adding in that cost of capital would be double counting in a way.

If on the other hand we were calculating present value of profits as a percent of premium, then those cost of capital assumptions could be used (although many past exam problems have done this calculation without any cost of capital assumption provided in the problem).

For the syllabus source on this topic, see the last paragraph of chapter 5 of the Individual Health Insurance book. It isn't perfectly clear there, but it is the best there is on the syllabus to guide us on this question.
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