Hi "Contracts of type A have positive non-unit reserves due to the projected future guaranteed charges being lower than projected future expenses. Type B contracts have negative non-unit reserves." The question then asks what direction the margin should move to be more prudent. I understand type A, as an increase in margin will increase surrenders, making the reserves higher. However i do not follow the logic for Type B. The examiners report says the margin should deducted from the surrender rate? Wouldnt a reduction to surrender rate, mean less surrenders, ensuring more negative reserves? Regards Kiran
Hi Kiran You have the answer the wrong way around. The solution says to use low surrender for type A and high surrenders for type B. Contracts of type A have positive reserves because charges are less than expenses. So by assuming low surrenders, there will be more expenses and hence the reserve is more positive. Contracts of type B have negative reserves because charges exceed expenses. So by assuming high surrenders, there will be fewer charges and hence the reserve is less negative. Best wishes Mark
Hi Mark But for contract A would that not mean we also receive more charges. Or because the reserve is already positive we assume that the charges received would increase less than expenses, hence a more positive reserve? And then the opposite logic for type B? Regards Kiran
Hi Kiran Yes there will be more charges too, but the expenses are bigger than charges, so expenses has the bigger effect. Best wishes Mark
