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Notes Q 23.4

S

SABeauty

Member
The notes describe PVIF as "present value of future shareholder profits from in force"

In the question it has a WOP contact with a profit criterion of 400, requires a reserve of 100 and a negative asset share of 200.

The answer says PVIF is 700.

I really don't see this - why is this the case? The profit is 400 so why is this not the PVIF?

Or is the PViF actually the total reserves held?
 
My Explanation for this question is as follows

PVIF Calc
Over the life of the policy the profit will be 400 so just after sale if you have a negative asset share of 200 that means that you will be due to get (from premiums, charges etc) 600 from the policy over the remainder of its life.
But you also have a reserve of 100 so the total VIF for this policy is 600+100


EV Calc
If you were to think about the PVIF just before this policy was sold it would be 400 (as this is the profit your expecting). If you were to add in the reserve it there would be a negative cashflow of -100 upon sale but this would be released back as +100 so overall its 400-100+100 the EV would be 400 still.

In reality there will be a cost of capital for holding the reserve so the above explanation is a simplification
 
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