Sample Dissertation Format - Scor

Similarly the equation of value for the risk premium is as follows:
Present Value (Expected Claims) = Present Value (Annual Risk Premium)
This approach is most suitable for short-tem annually renewable products with no long term
guarantee of premiums.
6.2 The Cashflow Approach
This approach usually uses a spreadsheet model to project the various cashflows under the
policy. The cashflows include premiums, expenses, commission, claims, contribution to
reserves and capital, interest on reserves, risk charge deductions and tax. These cashflows are
modelled for each time period to give the net cashflow, CFt, in each time period. The net
cashflow is calculated as follows:
CFt = Income for time period t – Outgo for time period t
The income would include the premium and interest while the outgo would include the claim
payments, expenses and commission.
The cashflow model looks at a sample policyholder or model point that would represent a
typical policyholder and uses a starting test premium estimate to calculate the net cashflows
under the policy. These net cashflows are then discounted at the risk discount rate to give the
present value of the future profits under the policy or simply the net present value. The
company may set as a target for its profit that the net present value under each policy be at
least a certain fixed percentage of the premium. The actuary will adjust the test premium
until the company’s profit target is achieved.
This method allows for the premium to be tested for sensitivity to changes in various
assumptions used to project the cashflows. The method also allows features such as options
to be accurately modelled using stochastic methods.
The cashflow approach is most suitable for long-term contracts because it can properly allow
for the timing of cashflows, reserves and capital. It may be used for short-term products to
determine the adequacy of premiums in the long term if the product has premium
guarantees or limited scope to increase premiums on a yearly basis.
6.3 Modelling for Health Microinsurance
The formula approach could be used to establish a suitable office premium as the health
microinsurance products have a term of only one year, in other words, they are annually
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