Hello, can someone explain to me how the profit emerging from the diffrent in the reserve basis and pricing basis expressed in the EV calculation ( reserve basis lighter then pricing basis?). Thanks
Hi Imagine a simplified example where a company is holding a prudent reserve of 110, for a payment in 1 year's time that it really expecs (eg on a realistic pricing basis) to be 100. Assume that the company has no free assets (ie that assets = 100 now too) and that it will earn no interest on the reserve. In the EV calculation of the present value of future profits, the company will project having a profit of 10 in 1 year's time. This 10 is the prudence in the reserving basis. It is then discounted back to give the PV. In reality, the lifetime of most policies is >1 year and the company will earn interest on the reserves, but the principle doesn't change. The prudent margins in the reserves held at t=0 will emerge in the projected profits over the lifetime of the contract. Best wishes for tomorrow Lynn
