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SweepingRocks 04-26-2019 03:34 PM

Full Preliminary Term Reserve Question
So I was going through some Coaching Actuaries Long Answer sample problems. Got to one about reserves and got all parts right except for one about FPT reserves.

The problem previously established that there were expenses associated with the insurance. However, when calculating the modified renewal premiums for FPT, the solution CA had did not take into account expenses and instead found the modified net premium and used that to calculate FPT reserves.

I know that FPT works by modifying the first premium to cover deaths in the first year and establish a reserve of 0 at end of year 1. I'm a bit confused why in this problem, expenses weren't taken into account.

I'll attach some pictures detailing the relevant parts of the questions. My issue is with part d in finding FPT reserve at end of year 2. As you can see, they found net premium instead of gross. Is it common practice to ignore expenses in this case?

Thank you in advance!


tkt 04-26-2019 05:41 PM

According to the SOA LTAM Notation and Terminology Note:

A modified reserve is a reserve computed without expenses but adjusting the valuation premiums to allow implicitly for initial expenses. A full preliminary term reserve is an example of a modified reserve. All modified reserves have the expected present value at issue of the benefits equal to the expected present value at issue of the valuation premiums; valuation premiums are typically lower in the first year or first few years than in later years. Any modified reserve questions on the examination other than full preliminary term reserves will specify the modification basis in the question.

Does that answer your question?

SweepingRocks 04-26-2019 06:38 PM

Yes it does! Thank you!!

NchooseK 05-08-2019 08:04 PM

No FPT this time--expect if you retake!

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