Why is a net premium valuation considered more suitable for valuing conventional WP contracts? Is it because the notional net premium is calculated on the reserving basis and hence any surplus arising in the future can be justifed to be actual experience being different from the basis. With the gross premium method the surplus arising could be broken down into release of margins and actual experience being different to pricing basis. Am I correct in my thinking?
I think the net premium reserve would be higher because: The Gross Premium includes an allowance for initial expenses so that in R= PV Benefits + PV Expenses - PV Gross Premium you can deduct more, whereas the Net Premium is calculated to cover only the benefits so that R = PV Benefits - PV Net Premium So a GPV can give negative reserves, whereas a net premium valuation shouldn't.
The Gross Premium will include loadings for future bonuses. As these have yet to be guaranteed, they do not need to be reserved for. Good luck for tomorrow: I'm getting rather bored of this exam
