PROCEEDINGS May 15, 16, 17, 18, 2005 - Casualty Actuarial Society

288 THE APPLICATION OF FUNDAMENTAL VALUATION PRINCIPLES² Capital needed to support the entire book of business, and² Federal income taxes applicable to earnings.The primary contributors to investment earnings are the timingdifferences between the collection of the premium and thepayment of claims and loss adjustment expense. For most linesof business, there is little delay in premium payment by the policyholder.When premiums are paid in installments, however,or when audit premiums represent a significant portion of theultimate collected premium, it is important to evaluate the lagbecause of the resulting impact on the investment income calculation.Reinsurance recoveries may need to be projected on acontract-by-contract basis if the indemnification terms vary significantly.In determining the future earnings from new and renewalbusiness, projected loss and expense ratios are the most importantcomponents to be modeled. As Miccolis [17] and Ryan andLarner [19] note in their papers on valuation, issues to be consideredin the projection of future loss and expense ratios include² Changes in price levels;² Trends in loss severity, claim frequency, and exposure base;² Historical industry results;² Underwriting cycles;² Target rates of return;² Expected future growth rates;² Degree of competition in market;² Regulatory environment;² Exposure to catastrophes; and² Changes in ceded reinsurance (coverage, terms, pricing).