Non-Unit Component BEL is positive or negative

[Saarthak Gosain]

Hi,
I had a query in relation to a Chapter 11 practice question:
Q11.7 part (i)
The solution states that
1) lower the initial charge, the more likely the non-unit component will be negative, since on-going renewal charges will need to be higher to compensate.
[ Wouldn't the expected present value of the increase in the renewal charges be same as the decrease in the initial charge, in order to compensate, there by leaving the BEL unaffected ?]
2) non-unit component is more likely to be negative for regular premium policies, since charges are more likely to be taken-up front for a single premium policy.
[I didn't understand the logic behind this. Wouldn't the same logic apply to this as above ?]

Thanks

 

[mugono]

Hi,
I had a query in relation to a Chapter 11 practice question:
Q11.7 part (i)
The solution states that
1) lower the initial charge, the more likely the non-unit component will be negative, since on-going renewal charges will need to be higher to compensate.
[ Wouldn't the expected present value of the increase in the renewal charges be same as the decrease in the initial charge, in order to compensate, there by leaving the BEL unaffected ?]
2) non-unit component is more likely to be negative for regular premium policies, since charges are more likely to be taken-up front for a single premium policy.
[I didn't understand the logic behind this. Wouldn't the same logic apply to this as above ?]

Thanks

Hi

I don’t have a copy of the notes. I see your point based on what you’ve written.

The wording may be unhelpful (I’ll leave others closer to the notes to judge) but I think the underlying idea being conveyed is that the different charging structure affects the timing of the cash flows and hence the PV charge income recognised in the NUR calculation.

The initial charges are applied to a customer’s initial investment whereas renewal charges are applied to assets under management, which grows over time.