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#1461
03-13-2018, 11:58 AM
 Adversely Selected Member CAS AAA Join Date: Nov 2004 Location: Michigan College: MSU Alum Favorite beer: M43 (N.E. IPA) Posts: 1,084

Quote:
 Originally Posted by Tacoactuary I compared the paper in the study kit to Cummins's paper "Asset Pricing Models and Insurance Ratemaking" and in that paper he defined k as premium to liability ratio and s as premium to surplus. He then derives the formula above and it checks. So it seems like he modified the formula he had derived before without paying attention to the fact that his variable definitions had changed. The correct formula for the study kit paper definitions should be $r_i = (-k_i / s_i) r_f + \beta_i ( r_M - r_f)$
So, you are saying just memorize how it is applied on exams.
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Exams: FCAS
#1462
03-13-2018, 12:02 PM
 Tacoactuary Member CAS Non-Actuary Join Date: Nov 2014 Location: Des Moines, IA College: Vanderbilt, UIUC Favorite beer: Yazoo Sue Posts: 1,135

Quote:
 Originally Posted by Adversely Selected So, you are saying just memorize how it is applied on exams.
ya, but if you did it correctly, you could probably win an appeal
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ACAS 7 8 9
#1463
03-13-2018, 12:02 PM
 GBM_ Member CAS Join Date: Nov 2015 Posts: 3,559

Quote:
 Originally Posted by Pi-Lingual On a scale of 1 to (exam) 6, how much does this exam put you to sleep?
Exam 6 -1 imo.

#1464
03-13-2018, 12:47 PM
 GBM_ Member CAS Join Date: Nov 2015 Posts: 3,559

back to BKM again this afternoon
#1465
03-13-2018, 12:52 PM
 therealsylvos Member CAS Join Date: Mar 2014 Posts: 16,711

Quote:
 Originally Posted by Adversely Selected Yes, you have to take into account when the economic profit is earned. It is not earned immediately, but at year-end, so you discount it to time 0. Your calculation of 998.9335 reflects the amount of return, but that is earned 1 year forward of when the investment is made. You invested 500K at time zero, but the profit is earned at time 1, etc.
But in the Goldfarb 1 period questions we don't usually discount it to time zero right? That was that was what that controversy over 2015 q 18 was about.
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Quote:
 Originally Posted by ao fan i like laying in the tube and pretending that i'm dead.
#1466
03-13-2018, 01:00 PM
 therealsylvos Member CAS Join Date: Mar 2014 Posts: 16,711

Quote:
 Originally Posted by Tacoactuary I compared the paper in the study kit to Cummins's paper "Asset Pricing Models and Insurance Ratemaking" and in that paper he defined k as premium to liability ratio and s as premium to surplus. He then derives the formula above and it checks. So it seems like he modified the formula he had derived before without paying attention to the fact that his variable definitions had changed. The correct formula for the study kit paper definitions should be $r_i = (-k_i / s_i) r_f + \beta_i ( r_M - r_f)$
That's essentially what stillgreen derived the return on equity to be in 1363. But my point is that Cummins doesn't say that formula is return on equity, he calls it "required underwriting return". I can't see how to he goes from that formula to return on on premium, but that's where he wants to go.

2012 Q 11 uses this r to calculate the combined ratio as simply 1 - r. If this is return on equity this relationship doesn't make sense.
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Quote:
 Originally Posted by ao fan i like laying in the tube and pretending that i'm dead.

Last edited by therealsylvos; 03-13-2018 at 01:06 PM..
#1467
03-13-2018, 03:13 PM
 GBM_ Member CAS Join Date: Nov 2015 Posts: 3,559

Going through notecards is torture. I can officially say idgaf about any of this material.
#1468
03-13-2018, 03:33 PM
 Tacoactuary Member CAS Non-Actuary Join Date: Nov 2014 Location: Des Moines, IA College: Vanderbilt, UIUC Favorite beer: Yazoo Sue Posts: 1,135

Quote:
 Originally Posted by therealsylvos That's essentially what stillgreen derived the return on equity to be in 1363. But my point is that Cummins doesn't say that formula is return on equity, he calls it "required underwriting return". I can't see how to he goes from that formula to return on on premium, but that's where he wants to go. 2012 Q 11 uses this r to calculate the combined ratio as simply 1 - r. If this is return on equity this relationship doesn't make sense.
r_i are returns on premiums and r_A is return on assets and r_E is return on equity. Where are we saying r_i is a return on equity?
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ACAS 7 8 9
#1469
03-13-2018, 03:38 PM

Quote:
Same
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ACAS 7 8 9
#1470
03-13-2018, 03:44 PM
 therealsylvos Member CAS Join Date: Mar 2014 Posts: 16,711

Quote:
 Originally Posted by Tacoactuary r_i are returns on premiums and r_A is return on assets and r_E is return on equity. Where are we saying r_i is a return on equity?
Cummins himself defines r_i as cost of capital for business i earlier in the reading (page 10 when talking about EVA). Hence my sleight of hand comment.

But looking over it again in the context of the initial

$r_e = r_a (1 + \Sigma k_i ) + \Sigma r_i s_i$

He redefines r_i as underwriting return.
__________________
Quote:
 Originally Posted by ao fan i like laying in the tube and pretending that i'm dead.