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#1
09-03-2017, 10:38 AM
 Ezea Member SOA Join Date: Dec 2015 Location: Texas College: UTD Alumni Favorite beer: Martin House Pretzel Stout Posts: 81
ASM example 29D 15th Edition

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

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
09-03-2017, 12:53 PM
 Gandalf Site Supporter Site Supporter SOA Join Date: Nov 2001 Location: Middle Earth Posts: 31,419

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
09-03-2017, 01:59 PM
 ronaldy27 Member CAS Join Date: Jan 2012 Location: 'Murica Studying for the credential Posts: 3,168

Quote:
 Originally Posted by Ezea 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

Premium is what insurers receive and expense is the costs that insurers incur.
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#4
09-04-2017, 10:21 AM
 Ezea Member SOA Join Date: Dec 2015 Location: Texas College: UTD Alumni Favorite beer: Martin House Pretzel Stout Posts: 81

Quote:
 Originally Posted by Gandalf 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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