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CT2 IAI Oct 2015 Q14

A

Anu

Member
Hi, Q14 is regarding the calculation of NPV. Part (i) and (ii) of the question asks us to calculate the NPV of the cash flows of XYZ and PQR.
This can be done by discounting the individual cash flows of each year I.e. claims less investment income to the present year for each year. But in the solution, they have just calculated the reserves at the end of year 6 and discounted that simply over 6 years. Ideally this is not what we do if we have to give NPV of cash flows.

Could anyone please help me understand why they have done it this way.

Thanks!!
 
Hi,

Can someone please help me with this question.
According to me we should have discounted the cash flows individually for each year or we could have discounted the reserves at the end of each year individually and not just discount the reserves at the end of 6th year.

Kindly respond soon.

Thanks!
 
The claims paid/reserves etc are not cashflows to the insurer. They are movements in the reserves. If any reserves had been released and flowed back to the insurer then these would be treated as cashflows for the NPV
 
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