Insurance Pricing, Reserving, and Performance Evaluation Under External Constraints on Capitalization and Return on Equity

Authors

  • Eric R. Ulm

    1. Eric R. Ulm, FSA, is an Assistant Professor in the Department of Risk Management and Insurance, J. Mack Robinson College of Business, Georgia State University, Atlanta, GA. The author can be contacted via e-mail: eulm@gsu.edu. I am grateful to Daniel Bauer, J. David Cummins, and Richard D. Phillips for useful discussions.
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Abstract

We derive formulas for calculating the premiums that should be charged on policies in a discounted cash flow model with tax reserves and required assets that are determined by regulation. We also determine the unique division of required assets into “reserves” and “capital” that allows the product profitability to be correctly evaluated. That is, the profit after capital charges is zero if the product achieves the return assumed in pricing. We illustrate the concepts using whole life insurance and guaranteed minimum death benefit examples.

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