Abstract
“Most people think that an insurance company's business is to make money out of insuring things. They are wrong. Its business is to take as much money off the public as possible, invest it successfully and hope that the conditions on which it was taken never happen.”The Economist, April 13, 1974 (p. 119)In order to motivate the series of Monte Carlo simulations we have carried out in the following article we would like readers to imagine that a small rural casualty insurance company, the Farm Fire and Flood Damage Ins. Co. (FFFDIC), is to be bought by an entrepreneur (whom we shall designate by EP) provided his consulting actuary (the author of this article) can satisfy his requirements which are as follow:(i) A 15-year investment is foreseen at the end of which time EP wishes to be able to sell, hopefully without loss.(ii) The risk-capital is to be invested and (although some of it must be in easily liquidable securities) should yield a rate of return comparable with that obtainable on the same amount of capital invested in the market.(iii) The premiums will not have risk-loadings, as such, but will be loaded for profit by 15%.(iv) The risk-capital should, on the average, be returnable at the end of the 15-year investment.
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