Fall 2013 LFV-U #8

I don't understand why you can skip the calculation of the expense reserve in this problem.



The value of the benefit reserve is 546.6, which I agree with.



The solution says 'since the maintenance expenses are a constant percentage of premium, there is no need to use the present value of expenses in the reserve calculation as the reserve will turn out the same'.



I don't understand how the reserve would turn out the same and still equal 546.6 if we incorporated the expense reserve.



Is it maybe trying to suggest that if we calculated the expense reserve, it would just equal the negative of the DAC anyway?



I happen to calculate a k factor for the expense reserve of 30%, so I got the time 4 Expense Reserve = -170, which doesn't equal the solution for DAC which is 121.6.



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I think I figured it out. Based on TIA there are 2 schools of thought when calculating the expense reserve...



1 - Include DAE when calculating the expense reserve (what I did)

2 - Exclude DAE when calculating the expense reserve



I think the solution assumed option 2 above, which would indeed result in 0 expense reserve at all future durations.



I guess this is one where you just have to choose one of the methods and explain it.

Fall 2013 LFV-U #8