PAA LRC when a financing component exists
I've been trying to understand this example from the educational note which is actually the same problem in Sample-7 from the Sample questions that the CAS posted earlier this week. I've been using all decimals in the calculation and the LRC balance at the end of last year is close to zero but not exactly zero. Can you explain why mathematically? My question probably derives from the formula used for the "insurance revenue financing component" which I interpret as the interest released as revenue at the end of each year. However I don't know how to interpret the part of the calculation when they multiply "prior insurance revenue financing component" times "% of remaining service provided in the period"
Comments
I am getting exactly 0 when I calculate it by hand? Are you carrying the decimals correctly? Your second row should be:
2040, 40.8, (40.4) , (1000), (1040.4), 1040.4
and your third row should be:
1040.4, 20.808, (61.208), (1000), (1061.208), 0
40.53 =(40.8 + 20 ) * 2/3
how do you get 40.4?
Also note that in Sample-7 from the CAS Excel file the final LRC balance is also NOT zero. It's a different problem so the numbers are different but the formulas are the same. LRC = -0.42
@graham
(60+40.8-20)*0.02. LRC balance should always be 0 when the service has been fully provided
(60+40.8-20)*.02 = 1.616, where does this fit in the calculation?
I'm assuming you meant (60+40.8-20)* 1/2 = 40.4, which would make sense if LRC balance should be 0 at the end, but have you looked at the answer provided by the CAS in Sample 7? LRC = -0.42 when the service has been fully provided. Is that incorrect?
It seems like the interpretation of "% of remaining service provided" is not the same in the Excel and Ed note. And yes, as I mentioned above LRC should be 0 once service has been fully provided, unless there is a special case when a financing component exists which is not stated in the Ed notes. Also, if LRC is not 0 when coverage has been fully provided you will have a liability into t = infinity which doesn't make much sense
Can you confirm if you meant (60+40.8-20)* 1/2 instead of (60+40.8-20)*.02 ? If not can you explain where this fits in the calculation?
Yeah I meant (60+40.8 - 20)*0.5