• We are pleased to announce that the winner of our Feedback Prize Draw for the Winter 2024-25 session and winning £150 of gift vouchers is Zhao Liang Tay. Congratulations to Zhao Liang. If you fancy winning £150 worth of gift vouchers (from a major UK store) for the Summer 2025 exam sitting for just a few minutes of your time throughout the session, please see our website at https://www.acted.co.uk/further-info.html?pat=feedback#feedback-prize for more information on how you can make sure your name is included in the draw at the end of the session.
  • Please be advised that the SP1, SP5 and SP7 X1 deadline is the 14th July and not the 17th June as first stated. Please accept out apologies for any confusion caused.

Chapter 23 and in Question 23.4

H

HelloWorld

Member
I am reading Chapter 23 and in question 23.4, the answer says that the EV rises by £400 and that the PVIF rises by £700. Can you tell me please as to why this is ? - What is the breakdown to come up with these figures please?

The breakdown of Free Surplus falling by £300 is understandable and explained in the solutions.
 
Hi

I'll give this a go :) (I've just taken a look at the q).

The key is to note: EV = VIF + FS.

Now, the company in pricing the NP contract targets a profit criterion of £400. So we know:

1. The contract is written on profitable terms at £400
2. NBS = initial expense + reserve (time 0+) - first premium. This can be re-expressed as reserve - asset share


The company now writes the product. We know that the EV will increase by £400 because this is their profit criterion (from 1). If it didn't they would have redesigned the product until this was the case.

Next, we know that the new business strain from writing the product is the increase in reserve less the asset share, £100 - -£200 = £300. (from 2 above). This will be a reduction to their free surplus.

Using the equation: EV = VIF + FS we have

400 = VIF - 300, so VIF = £700.
 
Thanks for this.

It is not obvious as the free surplus (FS) is "assets - liabilities". I saw no "assets" in the question and so got a bit lost. But I huess we have to assume that the "assets" in "assets - liabilities" is 0.

The other thing was that it was not obvious that profit criterion is the EV. I thought profit crietrion was future profit at a point in time criterion.

Many thanks
 
For the avoidance of doubt, the profit criterion and EV isn't synonymous. The profit criterion is however the company defines it (eg a return on capital, NPV etc).

Here, we were told the monetary profit criterion of the insurer. Therefore by writing a contract we know that the EV changes by the size of the profit criterion.

It is arguably better to view the numbers as the changes in VIF, EV and FS and not as absolute figures.

:)
 
You must log in or register to reply here.
Back
Top