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Practice Qns 27.5

L

Laura

Very Active Member
Hi everyone,

I'm confused on how to obtain the expected cost of increase in reserves - I can see how to obtain this for Year 1 i.e probably of policies in force in the following year multipled by the reserve amount of one year of office premium.

Would anyone be able to advise how to obtain the expected cost of increase in reserves for year 2 and 3?
 
Hi,

So we're holding a reserve of P at the start of the year. This reserve earns interest at a rate of 7%. So the expected cost of the reserve at the end of the year is P * 1.07 - P * prob of surviving the year = 1.07P - 0.99099P = 0.079P ie an expected release of some reserves.

Then in year 3 our reserve at the end of the year will be 1.07P and we can then release this reserve as the policy reaches maturity. So we can release the reserve in full.

Hopefully this helps?
Joe
 
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