CM1 Paper B Sept 2020 Qu1

Hi,

I am struggling to get my head around this question so have a question to hopefully help me understand.

Does the 'actual investment return achieved in the calendar year' replace i in the recursive formula?

How it is best to approach / think about this question.

Any help is much appreciated.

 

This is a tough question! You're right about replacing i in the recursive reserve formula with the actual investment returns.

The way I did this was to set up a table a little bit like you would for a conventional profit test and then use the retrospective recursive reserve formula:



Where CF(t+1) is the cashflow for policy year t+1 per policy in force at the start of that year (ie time t).

The above formula is taken from the recursive calculation of reserves guidance available on the PBOR in Part 5 of the course.

We want the retrospective formula (rather than prospective) because the insurance company wants to look back at how much it's accumulated during the policy in order to determine the terminal bonus amount.

 

Thanks very much!