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Exhibit – Page Two
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CAPM Pricing Model
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| Expected industry losses: |
$5,000,000,000 |
| Beta of losses: |
20% |
| Risk-adjusted discount rate: |
3% = 2% +20% x (7%-2%) |
| Discounted losses: |
$4,854,000,000 = (Losses/1.03) |
| Allocated Surplus: |
$2,427,000,000 (Assumed 50% per
authors’ model) |
| Interest on Surplus: |
$48,544,000 (2% risk-free rate) |
| Tax on interest: |
$16,019,000 (33%) |
| Losses plus tax allowance: |
$4,870,000,000 (Discounted losses + tax
on interest) |
| Gross Premiums: |
$4,870,000,000 / (1-30%)
= $6,957,000,000 |
| Rate per car: |
$1,391. |
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