Practice: 2 LVA problems (like 2013.Spring #10)

jj96gotthisjj96gotthis
in W-13-Other

Hi,

For the practice problems, the premiums are the same in all 3 years, even though the question has different premiums in year 2 and 3.

Is that true that we should always use the same premium as year 1?

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Thanks!

Comments

  • GrahamGraham

    No, that's a typo. It's fixed. Thx!

  • keshav1996keshav1996

    Hi,

    In the lifetime value analysis section, there are two questions-

    1. I'm confused with the trend periods. For example, why is the discount factor (in the sample answer below) 1.00 for year 1 and not 1/1.03 ?
    2. Going by my logic above and say we are given written premium (and not EP), would the discount factor be different for premiums and losses(and expenses) i.e for year 1, would it be 1 for premium and 1/1.03 for losses(and exp) ??
    image.png


    Thanks!

  • GrahamGraham
    edited October 2021

    Question 1:

    I see what you mean. You would think the discounting would go back to policy inception, but it doesn't; it goes back to the end of the first year. That means the data for the first year doesn't have to be discounted. That's also why the persistency in column (5) for the first row is always 100%. (When this table is created, we know for certain that the customer stayed until the end of the first year. What we do in the LVA problem is use the persistency to calculate the profitability subsequent to the first year, then at the end you put everything together to calculate the profitability over the whole lifetime of the customer.)

    Question 2:

    If you were given written premium, the best first step would be to calculate the corresponding earned premium. The method given in the text (and in this exam problem) assumes you're given earned premium so it's best to restate the given information in a format that fits the standard method.

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