• We are pleased to announce that the winner of our Feedback Prize Draw for the Winter 2024-25 session and winning £150 of gift vouchers is Zhao Liang Tay. Congratulations to Zhao Liang. If you fancy winning £150 worth of gift vouchers (from a major UK store) for the Summer 2025 exam sitting for just a few minutes of your time throughout the session, please see our website at https://www.acted.co.uk/further-info.html?pat=feedback#feedback-prize for more information on how you can make sure your name is included in the draw at the end of the session.
  • Please be advised that the SP1, SP5 and SP7 X1 deadline is the 14th July and not the 17th June as first stated. Please accept out apologies for any confusion caused.

Gross Premium Formula - negative reserves at the start

K

kze

Member
Hi,
I understand that the GPV formula is
PV expected future outgo - PV expected future income

However, it says that the reserves should be negative just before the payment of the first premium.

How is that so when there's no income at time 0? (Referring to the formula above)
 
Hi

Whether the reserve is negative or not will depend on the reserving basis used. More prudent assumptions increase the size of the reserve, and it may then be positive.

However, let's assume the reserving assumptions are realistic. Then, at time 0 (ie before any of the policy cashflows occur), we have:
  • PV expected future outgo = Realistic PV of future benefits, expenses, tax etc
  • PV expected future income = Realistic PV of all future premiums.
Presumably the insurance company has set the premiums to be enough to cover all the expected costs of providing the policy (benefits, expenses, tax etc) AND make some profit for the company, ie Realistic PV of all future premiums > Realistic PV of expected future outgo.

Hope this helps
Lynn
 
Hi ,
with regards to -ve non unit reserves the cards say:
Reserves can be -ne for non ul business partly bc:
1. initial expenses : it is explained that Premium has been set by accounting/recoup init exp. (Right?)
2. and due to capitalising expected future profit.

what do we mean by point 2?

Thanks
D
 
Hi ,
with regards to -ve non unit reserves the cards say:
Reserves can be -ne for non ul business partly bc:
1. initial expenses : it is explained that Premium has been set by accounting/recoup init exp. (Right?)
2. and due to capitalising expected future profit.

what do we mean by point 2?

Thanks
D
Insurers price products to make a profit. This is reflected / captured / capitalised when an insurer calculates the present value of future premiums. This increases the cash flow component of the calculated reserves.
 
so in the Balance sheet u see it as a decrease in the Bel?
or in case of a ul in the asset side?
 
so in the Balance sheet u see it as a decrease in the Bel?
or in case of a ul in the asset side?

1. Yes (in PV terms): reserves = benefits + expenses - premiums. Higher premiums reduce the reserves required.

2. In the case of UL business, the profit loading embedded in the charges would flow through / reduce the size of the non-unit reserves.
 
Back
Top