Ch 19

[Actuary@22]

Hi
Please explain how once the contract has begun, we no longer need to reserve for initial expenses and this leads to a negative reserve.
As per pg 4 section 2.1 GPV formula method of Ch19.

 

[Mark Willder]

Hi
Please explain how once the contract has begun, we no longer need to reserve for initial expenses and this leads to a negative reserve.
As per pg 4 section 2.1 GPV formula method of Ch19.

Hi

A prospective reserve is the expected present value of the future cashflows (claims plus expenses less premiums). Once a contract has been written, the initial expenses are in the past, so are not part of these future cashflows.

The insurer will have priced the contract to be profitable, ie the expected present value of the premiums will be greater than the expected present value of the claims plus expenses. So for a regular premium policy, the future claims and expenses will be lower than the future premiums and so the reserve will be negative (unless we have added large margins to the claims and expenses in the reserving basis).

Best wishes

Mark