Hi, I guess this is not necessarily a question about CP2 contents, but I am struggling to understand the formula under "First year's premiums": "Annual premium * n / 12 * (1 + return)^(n / 24) The divisor is 24 in the formula as on average, the return will apply to half the period that the premiums were paid over. This is the same as n/12 * 1/2." I do not really understand what the 1/2 is for. It is monthly premium payments and premiums are assumed to be paid at the beginning of each month. So why do we need to apply it to half the period?
Because policies are sold throughout the year, some will start in January (and have 12 premiums in the year) while some will start in December (and only have 1). Assuyming policies are evenly sold throughout the year, on average, a new policy will contribute 6 monthly premiums in its first year.
Hi, Thank you for the answer. I think this is something slightly different. In the calculation sheet provided, this formula is used for each individual policy. For example for a policy started in November 2009, for the first year accumulation, n is set to 2. And according to the assumptions, the monthly payments are made in advance. So I am still struggling to understand why multiplying 1/2 to it,
From your comment above it sounds as if it is allowing for the return being for half of the period (so for your example, 2 months with the return paid half way through that period). However, in the CP2 exam, you can always make an assumption about timing to simplify the calculations. Ensure that you document this in your audit trail. The model solutions produced by the examiners are one approach, a slightly different solution with valid assumptions would also be fine
