Pitfalls of IRR Pricing - Actuary.com
Pitfalls of IRR Pricing - Actuary.com
Pitfalls of IRR Pricing - Actuary.com
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Pushing the Limit<br />
Capital<br />
Extreme<br />
Before Capital Solution Solution<br />
Cash Flows<br />
Capital Solution<br />
<strong>IRR</strong> 8.0% 9900.0% 123679%<br />
PV Pr<strong>of</strong>its $159 $1 -99%<br />
FY Investment: 1,000 0 -100%<br />
1 (1,000) 999.99 (0.01)<br />
2 223 (222) 1<br />
3 201 (201) -<br />
4 181 (181) -<br />
5 163 (163) -<br />
6 146 (146) -<br />
7 132 (132) -<br />
8 119 (119) -<br />
9 107 (107) -<br />
10 96 (96) -<br />
Capital Budget <strong>of</strong> $1,000,000 for this Product<br />
<strong>IRR</strong>: 8.0% 15.5% 5.5% 6.3%<br />
PV Pr<strong>of</strong>its: $158,969 $12,812 $103,521 $116,333<br />
FY Investment: $1,000,000 $100,000 $900,000 $1,000,000<br />
Sell 1000 Policies Invest $900,000<br />
Corporate Invest $1,000,000 in 8% $100,000 in Term Difference in Total Corporate<br />
Capital Available Term Business Business 5.5% Bonds Cash Flows<br />
1 1,000,000 (1,000,000) (100,000) (900,000) (1,000,000)<br />
2 223,257 150,000 49,500 199,500<br />
3 200,931 150,000 49,500 199,500<br />
4 180,838 100,000 49,500 149,500<br />
5 162,754 50,000 49,500 99,500<br />
6 146,479 50,000 49,500 99,500<br />
7 131,831 (50,000) 49,500 (500)<br />
8 118,648 (100,000) 49,500 (50,500)<br />
9 106,783 (150,000) 49,500 (100,500)<br />
10 96,105 (164,619) 949,500 784,881<br />
7
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