• We are pleased to announce that the winner of our Feedback Prize Draw for the Winter 2024-25 session and winning £150 of gift vouchers is Zhao Liang Tay. Congratulations to Zhao Liang. If you fancy winning £150 worth of gift vouchers (from a major UK store) for the Summer 2025 exam sitting for just a few minutes of your time throughout the session, please see our website at https://www.acted.co.uk/further-info.html?pat=feedback#feedback-prize for more information on how you can make sure your name is included in the draw at the end of the session.
  • Please be advised that the SP1, SP5 and SP7 X1 deadline is the 14th July and not the 17th June as first stated. Please accept out apologies for any confusion caused.

Net Premium and Gross premium valuation query (Sept 2005, Qn : 3 Part (ii))

I

Indrani

Member
Hi,

The answer to the question(Sept 2005, Qn 3, Part ii) says ' Under the net premium valuation method, future premium valued vary with the valuation rate of interest'. Why is that?

At another part in the examiners report, it is mentioned 'Gross premium reserves are more sensitive to changes in market conditions'. Why is it so?

How does net premium and gross premium method work and how are they different from each other?(I know this is a very basic question , but most of my confusion seems to arise from not understanding the difference between the two clearly.)
 
Gross and Net Premium Reserves

This is the main area where I think it's worth going back and re-studying the ST2 Course Notes, which cover these reserving methods quite thoroughly. This is all "assumed knowledge" for SA2, so it's a good idea to make sure your clear on these methods.

Your questions are all related, so can be answered together.

The gross premium reserve is the present value of all future cashflows, ie benefits, expenses and premiums. Whenever the basis is changed, the value of all these components will change.

The net premium reserve is quite artificial and is defined to be the present value of the benefits less the present value of the net premiums, which are defined to be those premiums necessary to cover the initially-guaranteed benefits using the reserving basis. So every time the basis changes, the net premium is re-calculated and causes a change in value that partially offsets the change in benefits. This feature results in a method that is relatively insensitive to basis changes for regular premium business. Another advantage of this method (from the regulator's perspective) is that it doesn't capitalise future profits since it doesn't take credit for the profit loadings in future premiums.
 
You must log in or register to reply here.
Back
Top