Shared Flashcard Set

Details

Cummins capital
cummins other paper
7
Finance
Professional
03/18/2012

Additional Finance Flashcards

 


 

Cards

Term

Capital Allocation assists with value maximization

2) metrics

Definition
  • if RAROC is greater than cost, should grow in the line. If less, actions such as tighting UW standards  may be reqired.
  • EVA (economic value added)
Term
Economic Value Added Formula
Definition

EVAi = Net Incomei - riC

where ri = cost of capital for line i . 

  1. Can determine cost of capital for monoline firm
  2. Peform regression on data of multiline insurers to derive
Term
(3) sources of frictional cost
Definition
  1. Agency and Informational Costs - management may fail to achieve owners goal of value maximization
  2. double taxation - investing in securities via insurance companies produces lower after tax returns
  3. Various regulations may force the insurer to hold inefficent investments
Term

RBC - level of capital required to avoid regulatory intervention.

(3) problems

Definition

1) factors used are of questionable accuracy

2) calculations are often based on book value, not market

3)RBC ignores several important sources of risk

Term
3 uses with using VAR
Definition

approach is to weight lines by probablity line exceeds threshold

  1. firm may not have enough capital to acheive exceedence probability
  2. does not consider diversification
  3. does not reflect amount by which losses exceed

 

Term
Insolvency Put Option/EPD Ratio
Definition

Value = Le-rt - P(A,L,r,τ,σ) where Le-rt is the PV of claim if default risk where 0, and

P() is value of put option.

Allocate capital to achieve equivalent ratios across lines. Doesn't account for diversifaction

 

Term
Merton-Perold method
Definition
measure risk capital by the difference from the total when you remove the line - A&B&C - A&B = C
Supporting users have an ad free experience!