New Business Strain on Single Premium Policy and meaning of reserve

[Rajat gupta]

Hi All,

Can somebody please help me on two points:-
1. Is it possible to have new business strain for single premium contract? Is yes, then how? In answer to solution 1.2 of Q bank Part 1, it says that it is possible when prudence implicit in the solvency calculation (reserves plus solvency capital) is greater than margins for risk and profit in the premium basis. Can somebody please explain more on it. Why would insurer sell such a policy?

2. What I understand from reserve is that it is the money set aside to meet future contingencies. In life insurance does it is created from policyholders money(premium) or shareholders money(Capital) assuming a non mutual company where shareholders and policyholders are different ?

Regards,
Rajat

 

[Muppet]

NBS occurs if premium isn't sufficient to cover, initial expenses, reserves and capital required.
So if SP=100, IE=10, but you need to hold reserves and capital totalling 95, say, then there's a NBS (since 100 < 10+95).
You might still write the policy as you expect to make a profit at the end. If the reserves & capital are calculated prudently then hopefully you won't actually need the 95 for future payments and some of it will end up being released as profits.

In this example, the premiums you receive, 100, less the expenses, 10, will increase your assets by 90. And so you'd effectively be finding the other 5 from your shareholders' assets.

 

[Rajat gupta]

NBS occurs if premium isn't sufficient to cover, initial expenses, reserves and capital required.
So if SP=100, IE=10, but you need to hold reserves and capital totalling 95, say, then there's a NBS (since 100 < 10+95).
You might still write the policy as you expect to make a profit at the end. If the reserves & capital are calculated prudently then hopefully you won't actually need the 95 for future payments and some of it will end up being released as profits.

In this example, the premiums you receive, 100, less the expenses, 10, will increase your assets by 90. And so you'd effectively be finding the other 5 from your shareholders' assets.

Thanks Muppet