IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Projecting expected future cashflows and profit testing
A profit test of a savings-protection policy gives a net present value of profit, at the risk discount rate, of ₹1,260 per policy sold. The present value of premiums at the same rate is ₹18,000 per policy sold. What is the profit margin, defined as NPV divided by the present value of premiums?
The profit margin is 7.00%. It equals the NPV of profit divided by the present value of premiums, both at the risk discount rate: 1,260 ÷ 18,000 = 0.07.
- A6.67%
- B7.00%Correct
- C7.64%
- D14.29%
- 0.07%
Explanation
Profit margin = 1,260 / 18,000 = 0.07, which is 7.00%. Dividing by 18,900 (premiums plus profit) gives 6.67%. The inverted ratio 18,000/1,260 gives 14.29%.
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