R
razen
Member
Hi
I'm a bit confused about the relationship between VIF (value in force or present value of future profits) and statutory reserves.
I had always thought that there was an inverse relationship between the two, ie when VIF goes up then reserves reduce as these reserves have been released as profits.
But looking at it in a different way, if we held larger reserves, then our VIF will also be larger right, since eventually these larger reserves would all be released as profits. So this would imply that reserves and VIF are not inversely related as larger reserves lead to larger VIF. Have I got this wrong?
Which leads to my next question - if larger reserves lead to larger VIF, then wouldnt this imply that life companies are better off just holding unnecessarily large amount of reserves as this would just get released as profits in the future? Or does this not happen due to the cost of capital of holding large reserves?
Greatly appreciate any help in clearing my confusion.
Thanks
Razen
I'm a bit confused about the relationship between VIF (value in force or present value of future profits) and statutory reserves.
I had always thought that there was an inverse relationship between the two, ie when VIF goes up then reserves reduce as these reserves have been released as profits.
But looking at it in a different way, if we held larger reserves, then our VIF will also be larger right, since eventually these larger reserves would all be released as profits. So this would imply that reserves and VIF are not inversely related as larger reserves lead to larger VIF. Have I got this wrong?
Which leads to my next question - if larger reserves lead to larger VIF, then wouldnt this imply that life companies are better off just holding unnecessarily large amount of reserves as this would just get released as profits in the future? Or does this not happen due to the cost of capital of holding large reserves?
Greatly appreciate any help in clearing my confusion.
Thanks
Razen