Economics of Insurance Securitization

Part I - Increase in ROE



Insurance

GrossNet
Premium1,000675
Expected Losses-600-300
Expenses-300-300
Profit10075
Taxes-35-26
Net Income6549
-
Capital Required600
Cost of Capital-80-48
  After-tax ROE6.5 %8.9 %
  Risk-adjusted Profit-151

Parameters
Ceded Premium325
500
Investor Pre-Tax Actual Return5.0 %



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Current Configuration


Loss ratio: 60%

Expense ratio: 30%

Taxes: 35%

Capital required: 1,000

Credit Off B/S Capital: 80%

Cost of Capital: 8%

Ceded Loss: 50%

Investor Target Return: 5%


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ROE  vs  Investor Target Return
ROE  vs  Ceded Losses
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Part II - Stability of Earnings


Risk Warehousing  &  Risk-free ROE
GrossTotal Net
Premium1,000500175 675
Expected Losses (60 %)-600-300--300
Expenses (30 %)-300-150-150-300
Profit100502575
Taxes (35 %)-35-17.5-8.8-26.3
Net Income65331649
67 %33 %100 %
--80 %-
Capital Required1,000500100600
Cost of Capital (8.0 %)-80-40-8-48
  After-tax ROE6.5 %6.5 %16.3 %8.1 %
  Risk-adjusted Profit-15-7.58.30.8
  Source of Profit-1,000 %1,100 %100 %

Risk-Adjusted Profit Relative Distribution

Ceded losses:
Loss ratio:
Expense ratio:

Gross mean: 6.5 %

Net mean: 8.1 %