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Models Ch 14,15

A

Actuary@22

Very Active Member
Hi

In Ch 14,Section -Allowance for Supervisory reserves and solvency capital the formula for total profit arising over the year doesn't include any outflows explicitly. Please explain where are the outflows being taken care of.

In Ch 15,pg 14 Acted 2019 notes -question why PV of future profits for existing business would be positive. I didnt understand the Retrospective point of view. The company would incur expenses and commission in writing the business so there would be an initial strain then in that case wont the PVFP would be negative? Please explain the Retrospective view.

Thanks in advance
 
Actuary@22 said:
Hi

In Ch 14,Section -Allowance for Supervisory reserves and solvency capital the formula for total profit arising over the year doesn't include any outflows explicitly. Please explain where are the outflows being taken care of.

Thanks in advance
Click to expand...
Hi

The formula says that the profit is the increase in the assets in excess of the increase in the liabilities. Any cashflows in or our out will increase or decrease the assets.

Best wishes

Mark
 
Actuary@22 said:
Hi

In Ch 15,pg 14 Acted 2019 notes -question why PV of future profits for existing business would be positive. I didnt understand the Retrospective point of view. The company would incur expenses and commission in writing the business so there would be an initial strain then in that case wont the PVFP would be negative? Please explain the Retrospective view.

Thanks in advance
Click to expand...
Hi

The PVFP looks at what will happen in the future. An example might help. Let's ignore investment returns and discounting and consider the future profits in each year of -10, 5, 5, 5. This contract has a PVFP at time 0 of 5. We can see that the first year has a large negative profit due to the big initial expenses. So the PVFP at time 1 will be the PVFP at time 0 less the profit of -10, so PVFP = 5 -(-10) = 15 (this is the retrospective approach). Thinking prospectively we get the same answer PVFP = 5 + 5 + 5 =15.

Best wishes

Mark
 
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