Investment return

[shawnpaul]

Hi,

A past question asked to outline the effects of writing volumes of business significantly higher than those assumed in the business plan. Part of the solution said that "premium rates allow for investment return on all assets. As free reserves are spread over more policies, a lower rate of return will be achieved per policy and hence rates become inadequate".

I'm not sure I understand this as I thought that investment returns on free assets wouldn't have much of an impact on premium rates and also that by writing more business you'd increase your assets and hence investment return anyway?

Thanks

 

[Gareth]

Wouldn't it depend on whether there are big margins in your premium rates - otherwise you wouldn't be contributing to building additional free assets to reflect the new risks.

 

[Ian Senator]

Gareth's right. You may find that investment return on free assets influences premium rates more than you might think. For example, a risky line of business would have more (free) capital allocated to it. To make the desired ROC, that line must therefore generate larger profits - and hence might have higher premium rates.

Writing more business does increase assets as you say. But it increases liabilities too - and given the statutory requirements, this could be quite onerous. Hence the need to keep expansion under control.