The Question and Answer Thread

[blahbla]

Originally Posted by elmo

What i believe i got is 10% and 6.8%

Income = premium - expenses - ACTUAL reserves which is 200000*.75 - 125000 = 25000.

capital based on feldblum yields for part a -- 249392.7 and for part b --366666.67

I'm sorry, but in now way did you answer the question correctly except for coming up with the capital amounts. I'd count on .25 points for A & B for a total of .50 points.

[Streetlight 22]

Originally Posted by elmo

What i believe i got is 10% and 6.8%

Income = premium - expenses - ACTUAL reserves which is 200000*.75 - 125000 = 25000.

capital based on feldblum yields for part a -- 249392.7 and for part b --366666.67

Income has nothing to do with actual reserves. Reserves can be on the books for years. Income has to do with what was INCURRED that year.

[elmo]

Regerding raroc - for capital allocation you use the ELR but for rate of return since its after-the-fact you use actual reserves not ELR so we can debate until the cows come home whether this is raroc or not and we wont know until the people that fail get their point distributions but if it's raroc then this is the correct answer.

[elmo]

Originally Posted by Streetlight 22

Income has nothing to do with actual reserves. Reserves can be on the books for years. Income has to do with what was INCURRED that year.

I would say the the incurred loss is the reserves. I think its fair to assume that that's the case

[Dash.]

Originally Posted by elmo

Regerding raroc - for capital allocation you use the ELR but for rate of return since its after-the-fact you use actual reserves not ELR so we can debate until the cows come home whether this is raroc or not and we wont know until the people that fail get their point distributions but if it's raroc then this is the correct answer.

It can't be quite the right answer because the problem stated that reserves included UEPR. I did it a RAROC approach too, as opposed to calculating equity flows for IRR; but I think it's more likely that the IRR approach is what the problem writer was going for...

[MountainHawk]

Originally Posted by elmo

Regerding raroc - for capital allocation you use the ELR but for rate of return since its after-the-fact you use actual reserves not ELR so we can debate until the cows come home whether this is raroc or not and we wont know until the people that fail get their point distributions but if it's raroc then this is the correct answer.

I disagree with this. The reserves were stated to include UEPR, so they have some expenses in them.

I'm completely convinced that they were looking for {(1-ELR-Expense Ratio)/Allocated Capital}. The full IRR methodology requires the exact timing of payments.

[earl]

Originally Posted by MountainHawk

I disagree with this. The reserves were stated to include UEPR, so they have some expenses in them.

I'm completely convinced that they were looking for {(1-ELR-Expense Ratio)/Allocated Capital}. The full IRR methodology requires the exact timing of payments.

The real question is when they say RAROC is wrong, can we find anything in the syllabus to base our appeal on?

[MountainHawk]

The more I think about this, the more I think the question is probably defective. They ask for an IRR, but don't give you enough information to calculate it, they show loss + ULAE reserves that are dramatically below the steady state loss reserves of Premium * ELR * Avg Time to Payment.

[blue_bomber]

Originally Posted by earl

The real question is when they say RAROC is wrong, can we find anything in the syllabus to base our appeal on?

I'm assuming there will be a fair amount of people appealing this question, is this a fair statement? I was debating whether or not.

[MyKenk]

I never appeal anything.