P
paryas.bhatia
Member
In what way prospective and retrospective reserves help us? What does it help us find?
-
We are pleased to announce that the winner of our Feedback Prize Draw for the Winter 2024-25 session and winning £150 of gift vouchers is Zhao Liang Tay. Congratulations to Zhao Liang. If you fancy winning £150 worth of gift vouchers (from a major UK store) for the Summer 2025 exam sitting for just a few minutes of your time throughout the session, please see our website at https://www.acted.co.uk/further-info.html?pat=feedback#feedback-prize for more information on how you can make sure your name is included in the draw at the end of the session.
They help you because the exam could ask you to calculate them and this gets you marks, a CT5 pass, etc.
In reality, insurance companies need to hold reserves. They can't just sell a load of policies and then not worry too much about what happens after that. They need to think about all the money that they might need to pay out if policyholders die. Virtually all sensible valuations will be done on a prospective basis:
In the bank we must have EPV of all money going out less EPV of all money coming in
The basis for this will be prudent, heavier than expected mortality, lower interest rate and other prudent assumptions on tax etc. This protects policyholders and keeps the regulators happy.
A retrospective reserve is looking at what have we got in the pot so far?
If the policy has been priced correctly, the premiums should pay for the policy. The retrospective reserve is the accumulated value of all the money that has come in less the accumulated value of all the money that has gone out.
In reality, a life insurance company might calculate some reserves retrospectively for intermittent periods, every month say, but then revalue the reserve at year-end prospectively.
In CT5, if pricing basis = reserving basis and no interest or mortality assumptions are changed, the two reserves will be equal.
Good luck!
John
In reality, insurance companies need to hold reserves. They can't just sell a load of policies and then not worry too much about what happens after that. They need to think about all the money that they might need to pay out if policyholders die. Virtually all sensible valuations will be done on a prospective basis:
In the bank we must have EPV of all money going out less EPV of all money coming in
The basis for this will be prudent, heavier than expected mortality, lower interest rate and other prudent assumptions on tax etc. This protects policyholders and keeps the regulators happy.
A retrospective reserve is looking at what have we got in the pot so far?
If the policy has been priced correctly, the premiums should pay for the policy. The retrospective reserve is the accumulated value of all the money that has come in less the accumulated value of all the money that has gone out.
In reality, a life insurance company might calculate some reserves retrospectively for intermittent periods, every month say, but then revalue the reserve at year-end prospectively.
In CT5, if pricing basis = reserving basis and no interest or mortality assumptions are changed, the two reserves will be equal.
Good luck!
John
P
paryas.bhatia
Member
Thanks a lot Sir. That made my doubt crystal clear.