IRR, ROE, and PVI/PVE

Many actuaries like pricing all policies to the same return while letting Surplus requirements vary with risk. But, how do you measure the return on a policy? It is not as easy to define as its loss ratio. At this session, three related return measures will be presented. They are different adaptations of GAAP ROE down to a policy level. The author will explain the measures, prove some formulas relating them to one another, discuss how to reflect the distribution of possible loss outcomes, and present some sensitivity analyses. Finally, the author will argue that the three methods are better for corporate pricing applications than alternative “beta” based RA DCF (risk-adjusted discounted cash flow) methods.