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.
