PM&Res

[cappu]

Why is it said in GAAP syllabus Ch 3 that PM is indifferent with intermedian amount of res? I thought PV of profits would be affected by the emergence of reserves in the intermedian years while pv of prem was constant.

[PVFB=PVFP]

what is PM? and which page is it on?

[cappu]

Originally Posted by PVFB=PVFP

what is PM? and which page is it on?

PM: Profit margin. The statement lies right beneath Table 4-2 on Page 96...

[ACEManual]

What this is trying to teach you is that reserves start and end at zero. So if you look at the entire stream of profits with the same economic cash flows but there are different reserve streams (In total) the profits will be the same.

So the profit margin (for the entire life of the block) will be the same. (Same profits, same premium).

Now if you look at annual profitability - yes there will be very different pattern of earnings.

Jacob

[cappu]

Originally Posted by ACEManual

What this is trying to teach you is that reserves start and end at zero. So if you look at the entire stream of profits with the same economic cash flows but there are different reserve streams (In total) the profits will be the same.

So the profit margin (for the entire life of the block) will be the same. (Same profits, same premium).

Now if you look at annual profitability - yes there will be very different pattern of earnings.

Jacob

Thx for your reply. Yeah, the sum of Profit CFs dese is irrelevant of res streams but not the PV of profits. Actually, emergency of res will affect PV of profit but PV of prem that Profit Margin is subject to change.

[Paintball Wizard]

In other words, reserves are just a "timing" thing. And timing is everything in comedy and GAAP.

[Paintball Wizard]

Originally Posted by cappu

Thx for your reply. Yeah, the sum of Profit CFs dese is irrelevant of res streams but not the PV of profits. Actually, emergency of res will affect PV of profit but PV of prem that Profit Margin is subject to change.

More seriously, since you PMed me: certainly on a Stat basis, the timing will affect the PM% due to discounting.

But once you've established that PM% (e.g., 9.23% in the book, discounting with the expected investment earnings rate of 7%) to use in setting the GAAP Balance Sheet, you can see that the GAAP Book Profit (as % of Premium) is set up to time itself to be consistent with that PM%.

Change your discount rate or timing of stat reserve changes, and you will have to resolve your GAAP balance sheet. Of course, if either changes later on [for FAS60] after you issued and set up GAAP, you're screwed (can't unlock or resolve GAAP).