Hi All, I am facing difficulty in understanding how different basis like:- 1. Realistic Prospective Value 2. Earned Asset Share 3. Old Premium Basis 4. Current Premium Basis 5. Prospective Value using a basis with Margin determine profit before and after alteration while using equating value method? Can somebody please explain by giving examples in each case? Please reply asap Regards, Rajat
Hi Rajat When equating policy values we equate the value of the old policy with the value of the new policy. By placing a high value on the old policy the policyholder gets more for the old policy and the insurer gets less profit, so for the old policy: 1. Realistic Prospective Value - low value of old policy, so all profit we expected to make from original contract 2. Earned Asset Share - no profit as we give the policyholder back everything they put in 3. Old Premium Basis - includes some margins, so the profit accrued so far 4. Current Premium Basis - margins might be higher(lower) than the old basis, so higher(lower) value and less(more) profit 5. Prospective Value using a basis with Margin - same as 4 For the new policy it is the other way around. The more margins we add when pricing a new contract, the higher the profit for the insurer, so for the new policy: 1. Realistic Prospective Value - no margins, so zero profit for insurer 2. Earned Asset Share - cannot use this method for the new policy as it hasn't started yet 3. Old Premium Basis - includes some margins, so profit arises on new policy as long as basis remains profitable 4. Current Premium Basis - includes pricing margins, so same profit as earned from a new policy 5. Prospective Value using a basis with Margin - same as 4 I hope this helps. Best wishes Mark
