IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Gross premiums and reserves
Which statement about a net premium reserve compared with a gross premium reserve for the same policy is correct?
A net premium reserve ignores expenses and any premium loadings, whereas a gross premium reserve values future expenses and gross premiums explicitly, so they generally differ even on the same interest and mortality basis.
- AThe net premium reserve ignores expenses and any margins in the premium, so it is generally different from a gross premium reserve that allows for future expensesCorrect
- BThe net premium reserve always exceeds the gross premium reserve because expenses are excluded from the premium
- CThe two are always equal if the same interest rate is used
- DThe gross premium reserve ignores future premiums
- The net premium reserve includes the cost of future commission
Explanation
A net premium reserve uses only benefits and net premiums with no expenses. A gross premium reserve uses the office premium and explicitly allows for expenses, so the two generally differ. Equality does not follow from a common interest rate.
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