Hi, For the question on problems resulting from provisioning being too big or too small, I'm not sure how too small of a provision could lead to profits being recognised earlier. Appreciate any help on this. Thanks!
Hi Carmen Profits are increased by income in excess of immediate outgo that needs to be met from this - eg in respect of expenses and claims for an insurance company - and decreased by any increase in provisions needed. Sticking with insurance, this means that profits are higher in early years if provisions that need to be set up for new policies, increasing provisions, are lower as this reduces the assets that need to be held to match these provisions and so more income can be released as profit in those years. However, in later years, there will be less provisions to release (reducing provision) as policies approach and release maturity and so profits will not be as high as if higher provisions had been held. Higher profits in early years and lower profits in later years means profits are recognised and earlier. Hopefully this makes sense. In reality, the lower profits later due to low provisions being held will be offset to the extent that new policies are still being set up to offset policies maturing or ceasing due to death.
