What is the economic income equation?

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Multiple Choice

What is the economic income equation?

The economic income concept is the net present value of all expected future cash flows, with inflows from premiums and outflows from losses. In other words, you discount the future premiums you expect to collect and subtract the present value of the future losses (claims, expenses, etc.). This gives the value the insurer expects to create today from its future operations. Using the present value of future premiums minus the present value of future losses captures the time value of money and the profitability of future activities. The other forms either flip the order, use current amounts instead of future ones, or ignore discounting, which doesn’t reflect the economic value of future cash flows.

The economic income concept is the net present value of all expected future cash flows, with inflows from premiums and outflows from losses. In other words, you discount the future premiums you expect to collect and subtract the present value of the future losses (claims, expenses, etc.). This gives the value the insurer expects to create today from its future operations. Using the present value of future premiums minus the present value of future losses captures the time value of money and the profitability of future activities. The other forms either flip the order, use current amounts instead of future ones, or ignore discounting, which doesn’t reflect the economic value of future cash flows.

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