hi just a sticky one here from previous subjects. A net premium reserve = epv(future bens) - epv(future np). Yes? If so what is included in future bens? Also what is future np if it is not the future office premium?? How do we come up with the future np?? Thanks in advance.
Yes. So we do not include expenses in the calculation. The future benefits will include all the guaranteed benefits, eg sum assured, declared reversionary bonuses. A regulatory basis only firm will also need to check that the method makes appropriate allowance for future reversionary bonuses. The net premium is not the office premium that is actually charged. The net premium is the premium required from outset to cover the cost of the benefits only (ie again we do not include expenses). The net premium is recalculated each year using the reserving basis at that time. The method makes implicit allowance for expenses as the difference between the office premium and the net premium. Best wishes Mark
in the Q&A bank, for 2013 examination, Question 2.8. there is a list of problem with NPV. can please elaborate more on why 1)it does not allow explicitly for future bonus? 2)renewal expenses? 3)lapses? Thanks so much!
The NPV method is very old and predates modern computers, so it was kept as simple to implement as possible. The other main requirement of the method was to prevent future profits being capitalised at outset - to achieve this, the profit-loading part of the premium is not taken into account when deducting the value of future premiums. 1) It is simpler (computationally) to calculate the reserve at a lower interest rate, rather than to explicitly add in an extra part to the calculation to allow for future bonuses 2) It is simpler (computationally) to have an implicit allowance for renewal expenses, rather than to explicitly add in an extra term to allow for them. 3) It is simpler (computationally) to ignore lapses, rather than to explicitly add in an extra term to allow for them. (This assumes it is prudent to ignore lapses, ie that taking them into account would reduce the required reserves.)
