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Ch8 section 5.4 Liquidity?

S

Spock

Member
Hi,

I am a bit confused by the ActEd explanation here beneath the first paragrpah in bold on page 19 of Ch8. The sentence that confuses me is:

So a growing fund will require capital injections to help cover these expenses because renewals of earlier business will be at a lower level than needed to fully subsidise these costs.

Does this mean the growing fund needs capital to make up the shortfall of not having fully recouped the high intital expenses of earlier business as the high initial expenses will only be recouped slowly over many future renewals?

Geetha
 
Hi

Pretty much, yes. Put another way, if the portfolio of business was NOT growing, then there should now be sufficient profits coming from renewing business to make up this initial shortfall on any new business, so it would be less likely that any ADDITIONAL capital would be required at this point.

Hope this helps.

Steve
 
Okay, that makes sense. Competing uses for the capital - recouping initial expenses, financing new business.

Thanks

Geetha:D
 
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