determine profitability

Discussion in 'SA2' started by dimitris13, Jun 3, 2019.

  1. dimitris13

    dimitris13 Ton up Member

    Hi there,

    in chapter 11 it mentions that if BEL is negative it is usually the case that tis policy is profitable.
    is it a sufficient criterion or would it be better to check if the PVFP is positive or not ?

  2. mugono

    mugono Ton up Member

    Hi Dimitris13,

    I'd have thought that the negativity of the BEL would be sufficient to conclude that the policy was profitable. A negative BEL tells you that the premiums charged are higher than the claims and expenses expressed in present value terms.

    You would need to do further analysis to quantify the amount of profits embedded within the premiums but that would be outside the scope of your question :).
  3. Em Francis

    Em Francis ActEd Tutor Staff Member

    Thanks Mugono, yes agree but ...
    You would also need to look at the impact on the assets, ie the initial premium and the initial expenses. However, if the policy was written on profitable terms, then the fall in BEL should outweigh any fall in the assets. Or for policies with a positive BEL, then the increase in the assets should outweigh the increase in the BEL.
    And if defining surplus as {BEL+RM+SCR} then we need to consider the cost of setting aside the capital.
  4. mugono

    mugono Ton up Member

    Hi Em,

    I don’t disagree - your response (particularly the point ref the assets / new business strain) is ‘more accurate’.

    I suspect (I don’t have access to the note) that the core reading is making a general statement: contracts are “usually” written on profitable terms - therefore you’d expect the size of any negative BEL to exceed the day one strain. This is a persuasive ‘assumption’ given that a negative BEL is prevalent for newer longer term policies contracts (eg whole of life policies with a shorter premium paying term).

    I don’t disagree with the remaining aspects of your response (eg iro positive BEL, risk margin etc). These were just outside the scope of the question :).

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