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7. (7 points) xyz life produces value-based financial statements. you are given: • the hurdle rate is 12%. • the risk-free rate of return is 4.0%. • the inflation rate is 1.5%. • beta is 2.0. (a) (1 point) describe the capm formula and calculate the implied rate of return on average equity investments. (b) (2 points) describe validation techniques used to evaluate the accuracy and reliability of model Office projections used in value-based financial anlysis. (c) (4 points) abc life offers the same term life insurance product as xyz. xyz’s premiums are 5% higher than abc’s. both companies have the same inflation, investment and hurdle rates. xyz has priced the product to achieve an irr of 13%. (i) compare first year earnings for xyz for the following reporting methods. • ppm, • value-based financial reporting, and • level roe financial reporting. (ii) determine which company would report higher first year earnings under each of the reporting methods. justify your answer. course 8i: fall 2005 -8- go on to next page individual insurance – canada morning session 8. (4 points) senior management would like to introduce a commission schedule that eliminates vesting entirely. in return, agents will be paid higher commissions. currently, all commissions vest to agents at the time of a sale. you are given: current renewal commission scale: t 1 2 3 rt 3% 3% 3% ot 0 0 0 pt 1.0 0.90 0.80 proposed renewal commission scale: t 1 2 3 rt 5% 5% 5% ot 0 0.05 0.10 pt 1.0 0.95 0.90 where: t = policy year r = commissions as a percent of the gross annual premium ot = probability that premium on new business is written by agents who leave before business enters policy year t pt = probability that the annual premium for the policy year t will be paid • the discount rate is 3%. • expected sales under current compensation scale are $10.0 million of premium. • expected sales under proposed compensation scale are $10.5 million of premium. • expected expenses excluding commissions are 10% of premium. select the commission schedule that produces the highest net revenue for the company. show all work. course 8i: fall 2005 -9- stop individual insurance – canada morning session 9. (4 points) abc life is concerned about the trend of its fixed annuity sales relative to the rest of the industry. (a) describe available sources of data that may be used to evaluate the trend in fixed annuity sales. (b) describe issues for abc to consider in deciding whether to withdraw from the fixed annuity market. **end of examination** morning session course 8i: fall 2005 -10- go on to next page individual insurance – canada afternoon session **beginning of examination 8** individual insurance – canada afternoon session beginning with question 10 question 10 pertains to the case study   |
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