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Methods for Including Investment Income in Rates

This presentation discusses effective methods for incorporating investment income into rate calculations in the insurance industry. It covers the new regulation and filing forms, as well as the required underwriting profit calculation. The presentation provides a model framework and specific ingredients for considering investment income in rate calculations.

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Methods for Including Investment Income in Rates

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  1. Methods for Including Investment Income in Rates Richard A. Derrig, PhD President, Opal Consulting LLC Visiting Professor, Temple University CAS Ratemaking Seminar March 17, 2008 Boston, MA

  2. MASS PPA MANAGED COMPETITION • Effective April 1, 2008 • New Regulation (211CMR 79) and Filing Forms • Underwriting Profit Calculation Required • “Reasonable Return on Capital” • “Due Consideration of Investment Income” • Filing Form, Sheet 8: Show How Investment Income is Considered in Rate Calculation • No Required Method

  3. First Round for April 1, 2008General Ingredients • Expected Income • Invested Assets • Capital at Risk, Return Expected • Premium Held • Loss, Expense, and Taxes • Model Framework

  4. First Round for April 1, 2008Specific Ingredients • Expected Income: Embedded v Prospective • Invested Assets: Calendar v Policy Flows • Capital at Risk: Proportional Premium v Reserve • Return Expected: Management v Market • Premium Held: Policy Term v Flow • Loss, Exp, Taxes: Policy Term v Flow • Model Framework: Cal Year Acct v Cash Flow

  5. Initial Profit ProvisionsLiability v Physical Damage

  6. Initial Return on Equity/CapitalPre-Tax Return on Investment

  7. Initial Return on Equity/CapitalRate Change from 2007

  8. Modeling Supply and Demand Prices • Modeling Framework Depends on Supply or Demand Pricing • Supply Paradigm: IRR Cash Flow Models • Demand Paradigm: Myers-Cohn Model • Equilibrium for expected market clearing. • Short description and references available

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