Hi! i am a new comer.The following question about NPV and GPV confused me very much. Please help me. SA2 examer's report for 200509 Q3(ii) (comments on NPV) "However, under the net premium method, the future premiums valued vary with the valuation rate of interest. This means that, for regular premium policies, the reserves are relatively insensitive to changes in the valuation rate of interest and therefore changes in the market value of assets." SA2 examer's report for 200509 Q3(iii) (comments on GPV) "Gross Premium Reserve: This method will produce reserves that are more sensitive to changes in market conditions so will address that criticism. This is partly because the future premiums valued will no longer change when the valuation rate of interest changes. It is also because the assumption for future reversionary bonus will fall when asset values fall." My question: (1) How to understand "the future premium valued"? Is this refered to "present value of future premium"? and (2) Why NPV reserve is "insensitive" as well as GPV reserve is "sensitive"? I hope it would be best to illustrate the answer for me with a simple example. Thank you!
The future premium is the premium you allow to take into account in the valuation calculation. For regular premium policy, NPV is calculated based on initial SA/ little a. Therefore, the change of valuation interest rate would change the premium. GPV is just simply use office premium, which is not going to change. For single premium, using NPV is sensitive, as there is no future premium.
Thank you very much for your help. Makes things more clear. By the way, Can you help me with the other 4 quetions I posted in this forum?
