Measuring R.O.E. From a Financial Planning Perspective

As the array of products and services marketed by the financial services industry expands, competition among products for scarce surplus funds will increase. This paper proposes a method for assessing a financial product's performance in terms of return on equity that explicitly addresses the various elements of risk inherent in the product. To illustrate the concepts introduced, the various risk elements in a retrospectively-rated insurance product are discussed. These risk elements are then incorporated into a model that quantifies ROE as the internal rate of return of the flow of funds into and out of the surplus account.