IFP for a 6 month policy

Comments

• Graham

  January 2022

  That's one of the little tricks with in-force premiums that often catches people on the exam so it's good you discovered this while you're studying.

  The terms of the policies are irrelevant and here's the reason:

  • Suppose you have 2 annual policies in force on June 30, as in the problem above. That means the insurer is exposed to claims from these 2 policies.
  • Now suppose the 2 policies were 6-month policies instead, but otherwise exactly the same in terms of coverage. Well, the insurer has exactly the same exposure, not half the exposure. If one of these 6-month policyholders has an accident, they don't get half compensation just because their policy is only for 6 months. They get the same compensation as when someone with an annual policy makes a claim. (It's true they only paid half as much for their policy, but then the coverage for the 6-month policyholder only lasts for half as long.)

  So what I'm trying to say is that in-force premium measures the insurer's exposure at any given point time, and it doesn't matter whether the policies are 6-month or annual - they all count the same in this context, so you use the pro-rated annual premium to calculate total in-force premium, regardless of the actual policy term.
• railfan1975

  February 2022

  Okay, now I'm confused. Per our discussion above, Spring 2016 #2c should assign an IFP of $2,000 to Policy C. However, the examiner's report says IFP for Policy C is $1,000.
• Graham

  February 2022

  The short answer is that the examiner's report is correct, based on the Werner text, and my calculation in the web problem is wrong. I've corrected it and given you a shout-out in the solution section for that problem. We also send a BattleActs mug to subscribers who find material errors. I will send you a private message within the forum system with further details. Thank you for pointing that out.

  The longer answer is that that different companies handle this differently and my original In-Force Premium calculation followed what we did when I worked in pricing. But when I checked the Werner text, it is indeed calculated differently. In particular, the premium is not annualized. Werner correctly notes however (see below) that this makes it difficult to compare books of business with different policy terms. The solution is to "make adjustments" so that IFP statistic for books of business with different policy terms are comparable. This is what I was doing in my original solution to the web problem. (Note that no analogous adjustment is made in the calculation for the IFE statistic (In-Force Exposure) so just be careful whether the problem asks for IFE or IFP because it will be slightly different.)

  

  
  
• judyoh

  August 2023 edited August 2023

  
  
• Graham

  August 2023

  It looks like you submitted a blank post.