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Question 25.5 (page 8 of Chapter 25)

Z

zuglubuglu

Member
If a company has a strong reserving basis and we assume that there is no growth in business written (nor a change in the mix of business or an effect on investment), then wouldn't the profit in the long run be the same as the profit if it had a weaker reserving basis?

That is wouldn't the stronger reserving basis simply lower profit for early reporting years but then these are realised and stabilise once there are claim cohorts that are fully settled?
 
Yes that's correct, if there is no change (growth or reduction) in the volume of net written premiums, and ignoring any extra investment income earned on the (larger) held reserves, then in the short term the company with the stronger reserving basis would have lower profits, but its profits would then be higher in later years when the business is run-off and the reserves can be released.
 
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