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Gross Premium Formula - negative reserves at the start

Discussion in 'SP2' started by kze, Jan 5, 2019.

  1. kze

    kze Keen 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)
     
    kze, Jan 5, 2019
    #1
  2. Lynn Birchall

    Lynn Birchall ActEd Tutor Staff Member

    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
     
    Lynn Birchall, Jan 7, 2019
    #2
  3. dimitris13

    dimitris13 Member

    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
     
    dimitris13, Jan 10, 2019
    #3
  4. mugono

    mugono Ton up Member

    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.
     
    mugono, Jan 10, 2019
    #4
  5. dimitris13

    dimitris13 Member

    so in the Balance sheet u see it as a decrease in the Bel?
    or in case of a ul in the asset side?
     
    dimitris13, Jan 10, 2019
    #5
  6. mugono

    mugono Ton up Member

    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.
     
    mugono, Jan 10, 2019
    #6

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