Shareholder Profit

[dgw201]

Hello

Now I may be being stupid here, but I'm a little confused with the following sentance (page 3 chapter 7):

"Shareholder Profit = P + I - E - C
Here, claims can be considered to be increases in policy reserves plus a claim payment in excess of the opening policy reserve"

I would have thought that it should read claims in excess of expected claims for the period?

Also, this definition of claims doesn't seem consistent with the policyholder profit "C-P", so wouldn't cancel out to from I-E?

Any help much appreciated.

 

[Mike Lewry]

Any increase in total policy reserves over the year has to be funded and will therefore decrease shareholder profits by the same amount. Also, all claims have to be paid, whether they were expected or not, and so shareholder profits will also decrease by the total claim amount.

If a claim happens as expected, then the reserve will be released to pay the claim. So the decrease in reserves equals the claim amount and there's no overall impact on shareholder profits from such claims.

So, as you suggest, we could instead focus on "actual - expected claims", but then we'd need to combine this with the increase in reserves for just the policies that didn't become claims over the year, which makes things a little more fiddly.

I agree the C-P and P-C don't cancel out in each individual time period, so the relationship is only approximate. But it will average out over time since the overall change in reserve for a policy is always zero (ie the reserve just before a policy starts and just after it ends is the same, zero).