Term
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Definition
economic value of future profits - renewals of current policies
1) Significant for P&C insurers 2) Franchise Value is exposed to interest rate risk 3) Franchise value is often unmeasured, unreported and consequently unmanaged |
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Term
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Definition
| All business written on 1/1, all expenses paid immediately, all claims paid on 12/31, expect the same loss&expense each year |
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Term
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Definition
| Maintains same surplus each year, no risk of bankruptcy, no taxes, term structure is flat and calculations done on 1/1 |
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Term
| Panning Notation 1: P, E, L, y, S |
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Definition
| P= Premium, E=Expenses in dollars same each year, L= Expect Loss and LAE same each year, y = rf, S= Surplus (constant) |
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Term
| Panning Notation 2: k, cr, F, C |
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Definition
| k= Target Return on Surplus, cr= Client retention, F= Franchise Value, C= Current Economic value of Assets on Balance Sheet |
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Term
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Definition
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Term
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Definition
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Term
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Definition
| Infinite series [ P - E - L/(1+y)] * d/(1-d) where d = cr/(1+y) |
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Term
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Definition
| k=a+by so k is a linear function of the risk free rate |
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Term
| Franchise value with Pricing Strategy |
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Definition
| crS*(a+(b-1)y)/[(1+y)*(1+y-cr)] |
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Term
| Effective Duration of Franchise Value |
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Definition
D= (a-b+1)/[(1+y)*(a+by-y)] +
1/(1+y-cr) |
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Term
| 2 Managing Interest Sensitivity of Franchise Value |
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Definition
| 1) Limits of Using Investment strategies to Manage Interest Rate Risk - Investment is too small portion of duration 2) Invisibility of Franchise Value |
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Term
| Panning Solution to Management of Franchise Value |
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Definition
| Pricing Strategy using k= a +by: Key virtue - Avoids the potential Rating agency and Regulatory risk associated with strategies using invested assets. Implementation is nearly as invisible as the franchise value it protects. |
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