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

THE APPLICATION OF FUNDAMENTAL VALUATION PRINCIPLES 317Exhibit 9 is PSIC’s Statutory Income Statement. Exhibit 8,Change in Statutory Surplus, uses net income from Exhibit 9.The annual change in statutory surplus equals net income pluschange in unrealized capital gains. Net income has three basiccomponents: underwriting income plus investment income lessfederal income taxes. (The PSIC model does not include any“other income” amounts.) PSIC’s underwriting income equalsthe sum of income amounts for individual line of business underwriting.Investment income and federal income taxes are computedfor PSIC in total. Investment income includes investmentincome on the capital along with the assets generated by line ofbusiness.Sheet 1 for Exhibits 18, 19, and 20 provides the underwritingincome by line of business. Sheet 2 provides the calculation notesfor the components of the line of business underwriting income.The principal assumptions are as follows:Net Earned Premium² Direct written premium (DWP) annual growth is 4%.² 50% of DWP is earned in the year written, 50% in the followingyear.² Workers compensation and general liability have excess reinsurance(10% of the DWP is ceded).Net Incurred Loss and LAE² As shown in Sheet 4 of Exhibits 18, 19, and 20, the selectedloss and LAE ratios for each line of business are as follows:Direct Loss ALAE to Loss ULAE to Loss Ceded LossRatio Ratio Ratio RatioWorkers Comp 70.0% 8.0% 8.5% 100.0%Auto Liability 64.0% 8.5% 7.5% N/AGeneral Liability 68.0% 15.0% 8.5% 100.0%