Bharti Singla
Senior Member
Qus. 1 (i) Discuss the five key factors which would influence the amount of initial capital needed by the company to write a particular policy contract.
One of the factors given in the solution is:
Frequency of Premium Payment –
A lower premium modal frequency results in less premium being available at inception to cover the high initial expenses. This is compensated to an extent by lower reserves as we take credit for the future modal premiums receivable in our reserve calculation. However in case the policyholder dies or withdraws prior to contract termination this high initial expense may not be covered and thus the allowance for future premiums in the reserve calculation does not provide full protection as compared to say a single premium contract where all premiums are paid at the point of sale.
I do understand this point and my understanding is if the premium is payable less frequently, (annually rather than monthly, say) there should be more premium available to pay the initial expenses and hence there will be less capital required. However, the first line of the above paragraph suggests otherwise. Could anyone please clarify?
One of the factors given in the solution is:
Frequency of Premium Payment –
A lower premium modal frequency results in less premium being available at inception to cover the high initial expenses. This is compensated to an extent by lower reserves as we take credit for the future modal premiums receivable in our reserve calculation. However in case the policyholder dies or withdraws prior to contract termination this high initial expense may not be covered and thus the allowance for future premiums in the reserve calculation does not provide full protection as compared to say a single premium contract where all premiums are paid at the point of sale.
I do understand this point and my understanding is if the premium is payable less frequently, (annually rather than monthly, say) there should be more premium available to pay the initial expenses and hence there will be less capital required. However, the first line of the above paragraph suggests otherwise. Could anyone please clarify?