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SleepyBob
10-22-2002, 12:50 PM
On this question, the model solution uses actual experience in calculating cash flows (death in year 3, lapse in year 2). But if we are calculating value based earnings in year 1, it seems to me that we can only use actual experience from the first year.

When you calculate first year earnings, I think the cash flows in years 2 and 3 ought to be based exclusively on expected experience, not actual. Otherwise, it would be impossible to report earnings on a block of business until after the the line had been run off.

Am I right or wrong?

Thanks,
Rob

Datatarium
10-22-2002, 11:39 PM
Well, I think the product was priced using stochastic simulations so policy A and B are considered part of the pricing assumptions. The question wasn't very clear on it. Although from part a you could find out the lapse and death rates so you could have used those if you didn't think that you should use policy A/B info. I think I remember death rate = 1 at policy year 3 so you could project available earnings (or what ever it's called) for 3 years and then discount it back with hurdle rate to get PVprofits for IF. Hope questions are more clear this year.

Abducens
10-23-2002, 12:22 PM
My thread-killing rampage takes me here. I agree with SleepyBob, it was a poorly written question. I have not examined the model answer that much but if it's based on knowing -at issue- that person A was going to die in year 3, that's a ridiculous question indeed. He's right, you wouldn't be able to calc earnings until you had all the known experience if this were at all applicable to real life.

I never could decide which they wanted - expected or actual - my breakdown grade tells me they probably threw the question out or at least reduced its value, because I barely wrote anything worthwhile.

SleepyBob
10-23-2002, 03:15 PM
Well, I only got a 1 on the question last year, so I didn't write much either. Regardless of whether to use actuals or expecteds, the model solution does show the mechanics of earnings nicely, so it's been good to go over.