Good day
I have 2 questions surrounding the risk discount rate (RDR). I understand the RDR to be the rate being used to discount cashflows and determine the premium for a policy. The RDR effectively represents the required return of the shareholders for their investment into the company.
1) CAPM does not provide a good RDR since it does not account for the specific risks. So then how does CAPM relate to the RDR? In particular, how do we use the rate determined by CAPM in the statistical method of determining the RDR?
2) How does RDR differ from return on capital (if any)? I also understand that in the beginning of a policy, we experience strain. To cope with the strain, we require capital. I assume this is the capital that our shareholders have provided and so they require a return on. Wouldn't this just be the RDR?
Thank you in advance.
I have 2 questions surrounding the risk discount rate (RDR). I understand the RDR to be the rate being used to discount cashflows and determine the premium for a policy. The RDR effectively represents the required return of the shareholders for their investment into the company.
1) CAPM does not provide a good RDR since it does not account for the specific risks. So then how does CAPM relate to the RDR? In particular, how do we use the rate determined by CAPM in the statistical method of determining the RDR?
2) How does RDR differ from return on capital (if any)? I also understand that in the beginning of a policy, we experience strain. To cope with the strain, we require capital. I assume this is the capital that our shareholders have provided and so they require a return on. Wouldn't this just be the RDR?
Thank you in advance.