Can you kindly explain what the last line of this paragraph means in page 6? “It is also possible for the expense figure in the revenue account to include an allowance for depreciation, while there will be no corresponding cash movement in that year (there will in fact have been a cash payment in respect of that amount in some previous year).”
And also this part in page 29: “The aim is to maximise the total expense contribution plus profit, which will be equal to {number of sales} × {expense contribution and profit per sale}. This will be almost zero for very high and low premiums, and maximised for some middle-of-the- range premium – depending on elasticity of demand.” Thank you in advance!
Hi Kimiko An insurer could buy a car in the year 2020 for 20,000. This cash payment will therefore have been made in 2020. But the accounts may show this as an expense of 4,000 for the next 5 years say representing the depreciating value of the car. Best wishes Mark
Hi Kimiko A very high premium means very low sales and hence very low profit. A very low premium means very little profit per policy (and probably a loss). So extremely high or low premiums will not maximise total profit. Best wishes Mark
Hi Mark, can you kindly help me understand this sentence in the solution to Practice Question 31.1(i) under Investment: "Poor returns will increase the sum at risk and hence the cost from mortality." I thought poor returns would reduce the sum at risk since the unit fund will decrease (until it reaches the guaranteed SA, then I understand that the sum at risk will increase since the unit reserve will decrease)?
You are right that the unit fund will decrease and so the sum at risk (SA - unit fund) will increase. We are thinking here that the SA is bigger than the unit fund.
Thank you Mark! Can you kindly explain what the "risk" in the solution to Practice Question 31.3(ii) is referring to: "This will have similar risk and capital benefits to surrender penalty, but with less risk (as the surrender penalty would not apply on death), though the new design may appear to have more charges and hence be less marketable than before."
*Typo, meant to be 31.1(ii) in the question above Also, in the solution to Practice Question 31.2(iii): "Greater (or lesser) longevity than expected will lead to a mismatching of assets and liabilities that will increase the investment risk, possibly significantly." Why does lesser longevity increase investment risk?
