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#1




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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#2




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.

#3




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Expense is not an addition to premium. Premium is what insurers receive and expense is the costs that insurers incur.
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