New business model - capital requirement

[Y Chen]

Hi there,

I am a bit confused with how we can assess the amount of capital to write a product.
The notes say that
"For each product, total up the model point profit flows for the expected new business (new business model). This will enable you to work out the capital required to write that product."
Can you please help me visualise this? If I sum up the expected future profit flows for a policy, wouldn't I be expecting a net positive cashflow? How do I determine the capital needed?
I'm not sure I understand how this model would work..

 

[Mark Willder]

Hi there,

I am a bit confused with how we can assess the amount of capital to write a product.
The notes say that
"For each product, total up the model point profit flows for the expected new business (new business model). This will enable you to work out the capital required to write that product."
Can you please help me visualise this? If I sum up the expected future profit flows for a policy, wouldn't I be expecting a net positive cashflow? How do I determine the capital needed?
I'm not sure I understand how this model would work..

Hi Y Chen

Yes, if the contract is profitable and we sum up all the cashflows from all the years on new business, allowing for investment return, then we should get a positive amount. But that is not what is being described here.

The model described in the notes would work rather like a profit test model from Subject CM1. So for each individual year (or maybe month) we are summing up the cashflows from all the policies. We would expect negative cashflows in the first year for many products as expenses and reserving requirements would be bigger than the premiums paid. A year in which the cashflows are negative indicates a need for capital.

Best wishes

Mark

 

[Y Chen]

Makes sense thanks a lot!