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Calculation of EV Sep 2011 Que 4

R

Rajat gupta

Ton up Member
Hi All,

Can somebody please explain calculation of present value of future profit and calculation of release of reserves of the above question. I am not getting logic of (50%/75%) in the first table and table of release of reserves.

Thanks in advance!
 
Rajat gupta said:
Hi All,

Can somebody please explain calculation of present value of future profit and calculation of release of reserves of the above question. I am not getting logic of (50%/75%) in the first table and table of release of reserves.

Thanks in advance!
Click to expand...
Hi Rajat

25% of policies mature in year 1, 25% in year 2 and 50% in year 3. So the reserve in year 2 applies to only 75% of the policies. To calculate the year 3 reserve we need to ratio the year 2 reserve. The year 3 reserve applies to 50% of the policies, so we ratio by 50 / 75.

Best wishes

Mark
 
Hi Mark

Still not get the logic behind taking the ratio. Can you please explain more?:( In my understanding instead of (50/75) we should have taken only 50% as 50% of the policies are still inforce!
 
Rajat gupta said:
Hi Mark

Still not get the logic behind taking the ratio. Can you please explain more?:( In my understanding instead of (50/75) we should have taken only 50% as 50% of the policies are still inforce!
Click to expand...
Hi Rajat

Imagine there are initially 100 policies. We know the total reserve for year 2 is 3392 and that only 75 policies remain. So the reserve per policy is 3392 / 75. In the last year there is only 50 policies, so the total reserve is (3392 / 75) x 50, which we must then adjust for charges and investment return.

Best wishes

Mark
 
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