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in BUS 3024S - Contingencies by

In 2019 test 2 question 4 the reserve did not earn any interest , however, in acted question 28.5 ,which is very similar to test 2 question 4 ,the reserve did earn interest. Why is this so and how to tell if reserve earns interest or not in general?


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Hence no interest on reserve was used since 0,3P was instead of 0,315P for final year in expected cost of reserve ,where as in acted there was interest on reserve. Since they used 1,07P instead of P.image



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1 Answer

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by (140 points)

Hi


The questions used different layouts, but reserves set up at the beginning earned interest in both questions.


For the ActEd question, the expected cost of increase in reserves calculation is :

                          Reserve at the beginning

                         + Interest on the reserve 

                         - Required reserve for the lives in-force at the end


For the test question, the reserve at the beginning and the required reserve for the lives in-force at the end are placed in separate columns. 

The interest earned on the reserve set up at the beginning is included in the Int column.

The Int column calculation is:

                    0.05 x ( Reserve at the beginning + Premium - Expenses)


The interest on reserve is included, but it is included in different ways for each of the questions.

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