Hello,
I have a pretty basic question about the net premium reserves. I've always understood that each time reserving basis is changed, the net premiums are recalculated using this rather than the pricing basis. But if we did try to stick to the pricing basis only to set the net premium and use valuation basis for all the rest (ie PV of benefits, annuity in the PV of premiums), what would go wrong with this method? I mean, what would be the main arguments against such a modification to the standard approach?
To provide some context, I'm thinking of a situation when interest rate used to price the office premium were high and then with time the valuation interest rate was significantly reduced, to the point that the gross premium turned out to be lower than the net premium recalculated using this low interest rate. Then the difference between the gross premium and the net premium might not seem sufficient to cover the expected expenses.
Thank you!
Mateusz
I have a pretty basic question about the net premium reserves. I've always understood that each time reserving basis is changed, the net premiums are recalculated using this rather than the pricing basis. But if we did try to stick to the pricing basis only to set the net premium and use valuation basis for all the rest (ie PV of benefits, annuity in the PV of premiums), what would go wrong with this method? I mean, what would be the main arguments against such a modification to the standard approach?
To provide some context, I'm thinking of a situation when interest rate used to price the office premium were high and then with time the valuation interest rate was significantly reduced, to the point that the gross premium turned out to be lower than the net premium recalculated using this low interest rate. Then the difference between the gross premium and the net premium might not seem sufficient to cover the expected expenses.
Thank you!
Mateusz