Reserve Margin

[Silva]

Reviewing the case reserve (module 5), there are margins to consider on the pricing model. These margins turn in a "pessimistic" view of the business, as compared with the pricing model:

1. Mortality. People die more than expected
2. Persistency
3. Interest. The interest is lower, which means that there will be less investment income
4. Expenses. More expenses have to be paid

The way the margin lapse is used turns out in a lower lapse (5.4%) than in the pricing model (6%). Shouldn't it be the other way? I mean, it's worst if the lapse rate is greater than assumed, so, the initial costs are harder to recoup?

The way the model works, 1, 3 and 4 are "bad" news, but 2 is "good news"

Am I missing something here?

Thanks

[CuriousGeorge]

Depends on whether you put in a margin to increase persistency or decrease it.

And which is pessimistic depends on whether the product is lapse-supported (e.g. T100) or sometimes even the duration you are applying the margin to.

(I'm not taking this exam, and I haven't seen the model you are referring to, so these are general comments only.)

[asdfasdf]

Silva You are correct, if you remove the 10% margin from their spreadsheet it will give higher reserves, they probably messed the formula's up and the 10% margin was supposed to lead to a 10% higher lapse rate