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Old 09-03-2017, 10:38 AM
Ezea Ezea is offline
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Default ASM example 29D 15th Edition

The problem itself is straightforward, but there is a recursive calculation of premiums and expenses that is confusing me.

Annual Premium = $400
First Year % of Premium: 20%
First Year per Policy: $25

The calculation of the first year present value of premium and expenses is:
e_1 = 400(.8) - 25 = 295

Can anyone walk me through the logic? I would think that the expenses would be in addition to the premium. Something like 400(1.2)v + 25.
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Old 09-03-2017, 12:53 PM
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Gandalf Gandalf is offline
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Maybe you would think that if you focus on the words, but think about what makes sense. Why would you want to know the present value of Premiums plus expenses? But if you wanted to know the present value of what the insurer keeps from premiums and expenses (i.e,., its premium income after expenses), you would subtract the expenses.
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Old 09-03-2017, 01:59 PM
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Quote:
Originally Posted by Ezea View Post
The problem itself is straightforward, but there is a recursive calculation of premiums and expenses that is confusing me.

Annual Premium = $400
First Year % of Premium: 20%
First Year per Policy: $25

The calculation of the first year present value of premium and expenses is:
e_1 = 400(.8) - 25 = 295

Can anyone walk me through the logic? I would think that the expenses would be in addition to the premium. Something like 400(1.2)v + 25.
400 - (.2(400)+25) = 400(.8) -25

Expense is not an addition to premium.
Premium is what insurers receive and expense is the costs that insurers incur.
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Old 09-04-2017, 10:21 AM
Ezea Ezea is offline
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Maybe you would think that if you focus on the words, but think about what makes sense. Why would you want to know the present value of Premiums plus expenses? But if you wanted to know the present value of what the insurer keeps from premiums and expenses (i.e,., its premium income after expenses), you would subtract the expenses.
It's so obvious now that it hurts. Thanks for your help!
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