Hey guys, Does anyone know how to interpret or go about negative reserves when doing the projected revenue account? I know that negative reserves imply that the EPV of the premium income > than the EPV of the future outgo on benefits and expenses. Therefore should I multiply all the interest on reserves by -1 and make the positive ones become 'losses' or expenditure, and the negative ones positive income? Thanks in advance.
Not to interest rate but to each EPV. Negative Interest rate means value of same money received later is more than received now. (Expected present value of Projected Revenue of whole product period)=(-1)×(Gross Prospective Reserve) And if you want to make Projected Revenue accounts just take each factor differently(Profit/loss side), look for interest earn and discount factor equals 1.
Thanks for your fast reply, and my apologies for my badly formulated question. I am currently working on a life product (family income benefit) for university with which I am obtaining non-unit negative reserves at different points in time (EPV of future gross premium income > EPV of future outgo on benefits and expenses), and I am finding difficult to interpret them within the projected revenue account. So my main question would be: how can I interpret them on the 'interest on reserves' section of the projected revenue account? Would I multiply all of the reserves by -1 as you said? Thanks again.
Well! I studied Accounts whilst studying Chartered Accountancy. So, my answer is based on Book Accounts. Projected Revenue Account does not consider Present Value. But, It gives Projected Revenue at the end of the concerned period. Now, if the interest rate and discount are exact same, say, i. Then we can get Projected Revenue for new product=(-1)×(Gross Premium Reserve)×(1+i)=(EPV of future gross premium income - EPV of future outgo on benefits and expenses)×(1+i). (cut "1+i" if you need Present Value) Interpretion of Interest on Reserve in Accounts- If that's in Profit side means the insurer has earned interest on overall reserve. Example,(t is the time now) if reserve is 20 from time t-t+3, & 40 from time t+3-t+4, & 30 from time t+4-t+5. Then, interest on reserve will account as [20×((1+i)^3-1) + 40×i + 30×i]... (interest earned on interest and change-in-reserve taken differently). Conversely for interest on reserve on Loss side.
But the interest rate and discount rate do not necessarily have to be the same in order to do this, right? I appreciate your help
Yes! PS: For That 'i' I didn't meant Interest rate earned. But as discount factor for the period 1/(1+i). So, accumulated as (1+i)... That's why I say same. And in 2nd paragraph 'i' is interest rate earned.
