Hi Why is the discounted cashflow method the preferred approach? Also why is is the only approach for unit linked contracts? Thanks in advance!
The alternative to a discounted cashflow approach would be to use a formula, eg to set premiums such that EPV (premiums) = EPV (benefits + expenses). So, a formula doesn't incorporate, for example, the need to hold reserves and solvency capital and the company's profit criteria. These can be explicitly incorporated when discounting cashflows. For UL contracts, we're looking at non-unit cashflows, eg charges, benefits on excess of unit fund, expenses. We can't use simple formulae for these. Hope this helps!
