2nd Year Inv Inc
Instead of using [ 2 years of compounding ] - [ 1 year of compounding ]= [ EP x ( 1 + i )2 ] - [ EP x ( 1 + i ) ] to find the C+1 Inv Inc I used (TBEPc+INVINCc)*i and it gives me the same answer. I find this more intuitive since the investment income is the interest earned from the premium available and any investment income from prior years. Figured I'd post in case it helps anyone else.
Comments
Thx! I've linked to your post from the wiki and here's a link to the relevant section of the wiki:
Would it be more correct to say
InvIncCY+1 = (TBEPCY + InvIncCY) x i (like above)
rather than
InvIncCY+1 = (EPCY + InvIncCY) x i
because the revenue offset at the end of CY will be invested?
Yes. It's the tax-basis EP that's subject to investment, not EP.
Just to confirm, to calculate 1st year InvInc, we also use TBEP rather than EP?
i.e. 1st yr InvInc = TBEP x i?
"Revenue offset", change in UEP times 20%, is there to offset the acquisition cost that will subsequently be subtracted from TBEP, on the way to Tax-Basis Income (TBI).
I note that the wiki does not give a place to underwriting expenses in the TBI formula at all. This is because the wiki follows the text's format in deriving these formulae. I see that the only mention of underwriting expenses in the text in this chapter is thus:
". . . Other kinds of expense liabilities are addressed in a different paragraph in the IRC and may be subject to a different timing requirement."
The text essentially chooses not to talk about uw expenses in the context of TBI. But rest assured that they are subtracted out in deriving TBI.
To your question, "revenue offset" is not a "revenue" that comes in at the end of the year. It is an offset of the acquisition cost, which is related to the entirety of the year. So, yes, it is TBEP we use for the first year InvInc as well.