Reserves, chpt 5

[drake]

hi,
I couldn't get this thing, I hope somebody could help me out. So the questions are
1.) on page 25 just below Q 5.13, they demonstrate the equality of prospective and retrospective reserves using an example, now since both these reserves consider expenses as a future out go, but they have used net premiums for calculating value of income, we know that net premium when it is being calculated doesn't make an allowance for expenses, then why are we using net premium in our calculations of these reserves, and why not the actual premium that we would receive ?
2.) The definition of net reserves talks about considering notional premium for calculation of net premium reserve and the notional premium is calculated using the reserve basis so my questions are :
a.) is notional premium any different from net premium?
b.) what does reserve basis mean here?

 

[Robert Chadburn]

hi,
I couldn't get this thing, I hope somebody could help me out. So the questions are
1.) on page 25 just below Q 5.13, they demonstrate the equality of prospective and retrospective reserves using an example, now since both these reserves consider expenses as a future out go, but they have used net premiums for calculating value of income, we know that net premium when it is being calculated doesn't make an allowance for expenses, then why are we using net premium in our calculations of these reserves, and why not the actual premium that we would receive ?
2.) The definition of net reserves talks about considering notional premium for calculation of net premium reserve and the notional premium is calculated using the reserve basis so my questions are :
a.) is notional premium any different from net premium?
b.) what does reserve basis mean here?

(1): You say that both of these reserves consider expenses as a future outgo - this is not true, neither of the reserves include expenses. In a net premium world, expenses are totally ignored.
(2)(a): The notional premium is the same as the net premium. The net premium is just something we calculate as part of the calculation of the net premium reserve. The core reading is calling it "notional" simply to indicate that it is not the actual premium payable. Instead, this premium is the premium that the company would charge to cover just the benefits of the policy, in a world in which all expenses were zero.
(b) The reserve basis is the mortality and interest assumptions that have been used to calculate the net premium reserve. It is always the case that the net premium (ie the premium that is used in the calculation of the net premium reserve), is calculated using the same mortality and interest assumption as the reserve calculation itself. It is this fact that means that the retrospective net premium reserve and prospective net premium reserve are always equal.
I hope that helps??
I'm sorry it has taken so long to get a reply to you, hope it is still of some use.
Good luck.
Robert