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Long-Term Actuarial Math Old Exam MLC Forum

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Old 03-31-2018, 03:49 PM
ActuaryFromMTL ActuaryFromMTL is offline
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Default FPT reserves

Hi all,

Anyone understand the logic behind an insurer using FPT reserves? This concept is very poorly explained in ASM and they asked a question about it last october.

I understand how it works (1 year term insurance policy and a whole life policy starting one year later) but I don't understand the usefulness of it.

How is it related to expenses?

Thanks.
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Old 03-31-2018, 05:39 PM
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Under FPT, reserve at time 1 = reserve at time 0 =0. Thus, you don't have the extra expense of setting up the reserve in addition to all the issue expenses. Under NLP, you will have an expense item related to the increase in reserve.
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Old 03-31-2018, 06:00 PM
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Particular example of what are known as modified reserves. Due to high first year cash expense on issuing a policy (first year commission paid by agent) net level reserves would lead to accounting losses and reductions in surplus for a growing company.

Alternative to modified reserves is to set up a DAC asset which is the approach under GAAP as opposed to Stat accounting..
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Old 03-31-2018, 07:19 PM
ActuaryFromMTL ActuaryFromMTL is offline
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Thank you both for your replies.

After reading your replies and doing some research on my own, I came to the following conclusion: by using the FPT method, the insurer indirectly adjusts the first year reserve to be lower so that he has more cash in hand to pay for the acquisition expenses.

The insurer "mecanically" adjusts the reserve to be lower to allow more funds to finance the important acquisition expenses of the first year.

The more I looked at it, the more I realized that there is nothing else to understand other than this.
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Old 03-31-2018, 07:40 PM
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