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User 1234
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Could anyone please help me understand how the contribution method works in calculating the expense surplus when there is no expense loading in premium basis. Q&A 3.6 part (ii) is one of such examples.
The solution (ii) says "Contribution method involves a comparison of actual and expected (valuation basis) expense. For this contract there are no "expected expenses" in the premium basis. If the valuation basis allows for expense then comparing real against valuation expense will not be of much interest...................However if there is no expense element in the valuation basis then this would be a good way for the company to recoup expense"
My question is:
1. I thought the bonus = difference between actual and expected expenses (valuation basis). Why the solution suddenly brings up premium basis here? What does it to do with the premium basis?
2. Why it says "will not be of much interest"?
3. I understand the latter part -assuming actual expense is 10, expense element in valuation basis is 0, then the expense surplus is 0-10=-10, so we could reduce the bonus rates by 10. However I don't understand the point the former part is trying to give.
Thanks a lot in advance
The solution (ii) says "Contribution method involves a comparison of actual and expected (valuation basis) expense. For this contract there are no "expected expenses" in the premium basis. If the valuation basis allows for expense then comparing real against valuation expense will not be of much interest...................However if there is no expense element in the valuation basis then this would be a good way for the company to recoup expense"
My question is:
1. I thought the bonus = difference between actual and expected expenses (valuation basis). Why the solution suddenly brings up premium basis here? What does it to do with the premium basis?
2. Why it says "will not be of much interest"?
3. I understand the latter part -assuming actual expense is 10, expense element in valuation basis is 0, then the expense surplus is 0-10=-10, so we could reduce the bonus rates by 10. However I don't understand the point the former part is trying to give.
Thanks a lot in advance