I don't follow the CSM solution so I went back to the basic formula:
P = E*P + (A+T+p)*P + (i+u)*EP + h*P
The revised premium will be
P' = (1-k)*E*P + (A+T+p')*P' + (i+u)*(1-k)*E*P + h*P
where p' is the revised profit load.
Now if you divide both sides by P and combine a few terms
P'/P = (1-k)*E*(1+i+u) + (A+T+p')*(P'/P) + h
simplifying further,
P'/P = [(1-k)*E*(1+i+u)+h]/[1-A-T-p']
Now the problem states that the broker wants P' to be 40% of the
original P.
Filling in the numbers from the problem,
0.4 = [(1-0.625)*0.65*(1+.030+.025)+.065]/[1-0.15-0.030-p']
and so p'=0.0146 which is different from the -0.0035 that the CSM has.
Could someone please clue me in where I am wrong or if the manual is
wrong? Thanks!
----------------------
Jason Sash
Jason.T.Sash@EMCIns.com