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September 2017 CT5 Q12. - Reserves at end and start of year confusion.

W

William Lee

Member
Hi,
I am getting confused about the net reserves calculated in part Q12(i).
I don't understand why the reserves we calculated are at the start of the years 1 and 2 and not at the end of years 0 and 1.

For example in Q13(ii) - (in Sept 2017 as well) we had to calculate the reserve at the end of 2016 which is basically doing the same calculation as question Q12(i), i.e. EPV[future benefits] - EPV[future Prem] for the 8 future years.

By the logic of Q12(i) this reserve we calculated (in Q13ii) would be the reserve at the start of 2017 not the end of 2016?

Would be grateful if someone could help me.
 
Hi William,

Sorry that I missed your sending of this at the time.

You are right. In CM1, and I suppose logically as well, there's little practical difference between the very end of one year and the start of the next. So the reserve would be calculated in the same way for both.

When it comes to mortality profit as in Question 13 of this paper we calculate reserves at the end of the year. The logic being the death strain at risk is (amount paid on death at end of the year) - reserve at end year - survival benefit at end year. So the amounts are consistent with each other. Within a profit test we work out reserves to be held at the start of each year but then we set them up at the end of the previous year.

Since the calculation of reserves end of one year or start of the next are the same I presume the issue would be notation or writing the "wrong" one out in the exam. Examiners will focus on the calculations themselves. So provided your calculation is correct there should be no issues in scoring the marks.

Joe
 
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