Hi, In ST2, it suggests that "Net premium valuations make an appropriate allowance for future bonuses by a suitable reduction in rate of interest". I guess that the rate of interest in the above statement is the valuation rate (the assumed investment return). Question: If we reduce the valuation rate, do I need to reduce risk discount rate as well consistantly? Thanks
Hi The answer to your first part i.e. the rate of interest in the above statement is the valuation rate (the assumed investment return is that yes, the interest rate is the valuation rate assumed in Net Premium Method. The rationale is that since lower interest rate is assumed hence the investment surplus will be higher (because the actual investment return is higher than the assumed rate), therefore, the investment surplus generated can cover up the bonuses to be declared. This method is generally considered superior than Gross Premium Method in case of conventional with profits products as it does not capitalize the future profits as in the case of Gross Premium Method (due to difference in pricing and valuation assumptions in Gross Premium Method). To your second part, I want to understand that which risk discount rate you are referring to. In case of Net Premium Method, both net premiums and the net premium reserve are calculated at the same rate of interest. Please clarify . Thanks Hims
