IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Projecting expected future cashflows and profit testing
For a block of endowment policies, the expected present value of profit (the NPV from the profit signature) at the risk discount rate is ₹36.40 per policy sold. The expected present value of premiums at the same rate is ₹1,300 per policy sold. What is the profit margin?
The profit margin is 2.80%. It is the expected present value of profit divided by the expected present value of premiums at the same rate, so 36.40 / 1,300 = 0.028. Using a different base, such as 1,000, would give 3.64%, which is wrong.
- A3.64%
- B2.72%
- C28.00%
- D0.28%
- 2.80%Correct
Explanation
Profit margin = NPV of profit / PV of premium income = 36.40 / 1,300 = 0.0280, or 2.80%. Dividing by 1,000 gives 3.64%, which uses the wrong base. Both the numerator and the denominator are discounted at the risk discount rate.
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