Apr 22 Q-4 i),iii)

[Actuary@22]

Hi

Pls explain part i) of Q 4.I didnt understand how using profit adjusted AS represents the maximum the company could pay allowing for profits to date and pls explain the whole answer.

Also in part iii) to calculate the PA EAS why have we multiplied by 1.02. and deducted 30.Pls explain.

Thanks

 

[Mark Willder]

Hi

Pls explain part i) of Q 4.I didnt understand how using profit adjusted AS represents the maximum the company could pay allowing for profits to date and pls explain the whole answer.

Also in part iii) to calculate the PA EAS why have we multiplied by 1.02. and deducted 30.Pls explain.

Thanks

Hi

A standard asset share represents the accumulated cashflows from the contract so far. If the insurer pays out more than this then it makes a loss, ie the payout is more than what it has received.

However, this exam question is rather unusual. It introduces the concept of a profit adjusted earned asset share (PA EAS). It is calculated in the same way as a standard asset share except that the premium does not include the profit loading. This means that the PA EAS is equal to the EAS less the accumulated value of the profit loadings. So if the policyholder is paid the PA EAS, then the insurer will have made a profit equal to the accumulated loadings (as what they have is the EAS, but they only pay out the PA EAS).

This explains most of the solution to part (i). The rest of the solution notes that the asset share only looks at cashflows to date, so does not consider cashflows that will happen in the future.

In part (iii) we need to adjust the asset share for the corrected expenses. The original asset share assumed that expenses of 100 had been paid at the start of the previous year. We are now told that the expenses are 30% higher, ie 0.3 * 100 = 30. As they were paid at the start of the year they need to be rolled up with interest at 2%.

Best wishes

Mark