Chapter 9 Valuation Bases

[sreevarad]

In the section 4 - Discounting, towards the end (before section 4.1) it is mentioned that “instead of adding this investment income to the reserve to avoid an increase in reserve, it must be grouped with the total investment income.”

I find the previous para before this more intuitive- “ as claims reserve is increasing, claims incurred will also increase. However this is countered by income received in respect of reserves, which is known as unwinding of discount rate”.

If this is the case, not considering increase in incurred claims and considering increase in investment income will lead to higher retained profits in P&L account which increases Liability side of balance sheet without a corresponding increase in assets.

Can someone please explain Thanks in advance.

 

[Katherine Young]

...not considering increase in incurred claims and considering increase in investment income...

This isn't quite right.

The last paragraph says "Instead of adding this investment income to the reserve to avoid an increase in reserve, it must be grouped with the total investment income". In other words, the reserve WILL increase (which will increase the liability side of the balance sheet) and the investment income will increase too (which will increase the asset side of the balance sheet).

In short, if your investment return is the same as your discount rate, the net effect is nil.

Best wishes,

Katherine.

 

[sreevarad]

Thanks