Chapter 21: Q21.13

Hi,

I was working through Q21.13 where we are asked to calculate the profit or loss to the company given some information which affects cash-flows (e.g. premiums received, total sums assured that were paid in respect of death, total sums assured that were surrendered during the year etc).

Apologies for the abundance of detail, but when looking at the solution, I had the following two questions:

• We are told that the surrender value on each policy was calculated at 85% of gross premium prospective reserve at the date of payment of the surrender value. However, why isn't the 15% of the gross premium prospective reserve (that is presumably retained by the company) at the end of the year not reflected as an income / part of the funds available at the end of the year?

• When overall profit for the year is calculated (ie the last calculation at the bottom of page 58 of Ch.21) it uses funds needed at the end of the year (the second to last calculation). Funds needed at the end of the year is calculated as: the reserves required at the end of the year + death benefits paid + surrender benefits paid. However, I was wondering why it doesn't subtract the reserves held at the beginning of the year from this amount. That is, why doesn't the calculation consider using the differential between reserves at the start of the year (given the firm has set this money aside already) and end of the year (and then adding death benefits paid and surrender benefits paid) rather than the total reserves figure at the end of the year.

Hopefully, the questions above are understandable.

Thanks,
D

 

Hi Damian,

This is what I think:

The 15% does end up as part of the profit/loss. You release the whole reserve of the surrenders and only pay out 85% and so the rest will end up in profit. You don't need to explicitly allow for the 15% or you will be double-counting when releasing the reserve.

It has already allowed for the reserves at the start of the year in the funds available (3.181), so the overall calculation is doing what you have suggested.

J