Chapter 7

Reserve

7.1
z

A benefit reserve is the difference between the expected value of future benefits and the expected value of future premiums.

V = E ( PV of future benefits) E ( PV of future premiums)

7.2 Fully Continuous Benefit Reserves

z

Prospective Loss at time t

T ( x ) t L = v P ( A x ) aT ( x ) t t

The expected value of the prospective loss at duration t, given that the insured survives at least until t, or E ( t L | T ( x) > t ) , is called the reserve at duration t for the policy, and we can calculate it as followed:
t

V ( Ax ) = Ax +t P( Ax )a x +t

Example1
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For a fully continuous whole life insurance, the force of mortality is constant and equal to , the force of interest is . Calculate the t-th reserve for the policy

Example2
For a fully continuous 20-year endowment of (x): 1. The force of mortality is 0.02 2. =0.06 3. The benefit premium is determined by the equivalence principle. Calculate the 10th terminal reserve.
z

Fully Continuous Benefit Reserves: Age at Issue x, Duration t, Unit benefit

Name Whole life insurance Actuarial notation Prospective formula

V ( Ax )
V (A
1 x :n

A x +t P( A x )a x +t
A
1 x + t : n t

n-year term insurance

t

P( A

1 x :n

) a x + t : n t t < n t=n

n-year endowment insurance

t V ( A x:n )

A x + t : n t P ( A x : n ) a x + t : n t t < n 1 t=n

h-payment years, whole life insurance

h t

V ( Ax )

A x + t h P ( A x ) a x + t : h t t < h Ax +t t>h

Fully Continuous Benefit Reserves: Age at Issue x, Duration t, Unit benefit

h-payment years, nyear endowment insurance

A x + t : n t h P ( A x : n ) a x + t : h t t h < n
h t

V ( A x:n )

A x + t : n t 1

h<t <n t=n

n-year pure endowment

V (A )

1 x:n

Ax +t : n1t P( Ax :1n )a x +t : n t t < n 1

n t |

t=n

n-year deferred whole life annuity

t

V ( n| a x )

a x +t P( n| a x )a x +t : n t

tn t>n

a x +t

7.3 Other methods for calculating the Benefit Reserve

z z z z z

1) Prospective Formula 2) Retrospective Formula 3) Premium Difference Formula 4) Paid-up Insurance Formula 5) Other Reserve Formula
z z z

5a) The Annuity Reserve Formula 5b) The Premium Reserve Formula 5c) The Death Benefit Only Formula

Formula
Name Actuarial notation
t

1) Prospective Formula 2) Retrospective Formula 3) Premium Difference Formula

V ( A x ) = A x +t P( Ax )a x +t

P ( A x ) a x:t A1x : t t V ( Ax ) = t Ex t Ex
t

V ( Ax ) = P ( A x +t ) P( Ax ) a x +t

4) Paid-up Insurance Formula

P( Ax ) t V ( A x ) = 1 Ax +t P( Ax +t )

Formula
Name Actuarial notation

5a) The Annuity Reserve Formula 5b) The Premium Reserve Formula 5c) The Death Benefit Only Formula

a x +t t V ( Ax ) = 1 ax

P( A x +t ) P( Ax ) t V ( Ax ) = P( Ax +t ) +

Ax +t Ax t V ( Ax ) = 1 Ax

1) Prospective Formula
t

V ( A x ) = A x +t P( A x )a x +t

. Premium x benefit P x+t 1 1 1 . 1 . 1 . . 1 1 P P P . P . P P .

Example1 (Prospective)
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1) 2) 3) 4)

For a fully discrete 5-year deferred 10-year term insurance of 1 on (x), premiums are payable for 15 years. You are given qx = 0.1 in all years. i=0. T is the future lifetime random variable. tL is the random variable for the present value of future lossed Calculate E[10L|T>10]

Example2 (Prospective)

Example3 (Prospective)

2) Retrospective Formula
Re serve = ( APV at t of past premiums ) ( APV at t of past benefits )

P ( A x ) a x:t A1x : t t V ( Ax ) = t Ex t Ex

( Accumulation )
. . . . .

Premium P x benefit 1 P

1 .

x+t 1

. .

Example1 (Retrospective)

Example2 (Retrospective)

3) Premium Difference Formula

t

V ( A x ) = A x +t P( A x )a x +t
Ax +t By this formula P( A x +t ) = a x +t

V ( Ax ) = P( Ax +t ) * a x +t P( Ax )a x +t = P( Ax +t ) P( Ax ) a x +t

Example (Premium Difference )

4) Paid-up Insurance Formula

t

V ( Ax ) = Ax +t P( Ax )a x +t
Ax +t By this formula P( A x +t ) = a x +t

V ( Ax ) = Ax +t

Ax +t P( Ax ) P( Ax +t )

P( Ax ) = 1 Ax +t P( Ax +t )

Example (Paid-up)
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Joan has been paying annual premiums for a continuous whole life policy since she was 25 years old. The face value of the policy is 100,000. Joan is now 65, is retiring, and would like to stop paying premiums and take a reduced, paid-up whole life policy. Use the following to determine the appropriate face value of the paid-up policy. Given i ) a 25 = 16

ii ) A25 = 0.09 iii ) P( A65 ) = 0.044

5a) The Annuity Reserve Formula

t

V ( Ax ) = Ax +t P( A x )a x +t
t

( By this formula A

x +t

= 1 * a x +t

V ( Ax ) = 1 * a x +t P( Ax )a x +t = 1 + P( Ax ) a x +t a x +t = 1 ax

Ax +t 1 a x +t By this formula * = a x +t a x +t a x +t 1 P ( A )= x t + a x +t 1 a = x t + P( Ax +t ) +

Example1 (Annuity Reserve)

Example2 (Annuity Reserve)

Example3 (Annuity Reserve)

5b) The Premium Reserve Formula

t

V ( Ax ) = Ax +t P( Ax )a x +t

Ax +t By this formula P( A x +t ) = a + x t

V ( Ax ) = P( Ax +t ) * a x +t P( Ax )a x +t = P( Ax +t ) P( Ax ) a x +t P( Ax +t ) P( Ax ) = P( Ax +t ) +

Ax +t 1 a x +t = * By this formula a x +t a x +t a x +t 1 P ( A )= x t + a x +t 1 a = x t + P( Ax +t ) +

Example (Premium Reserve)

5c) The Death Benefit Only Formula

a x +t By annuity reserve formula t V ( Ax ) = 1 ax

1 Ax +t 1 Ax

V ( Ax ) = 1

1 Ax +t = 1 1 Ax 1 A x (1 A x +t ) = 1 Ax Ax +t Ax = 1 Ax

By formula 1 Ax +t a x +t = 1 Ax and a = x

Example1 (Death Benefit Only)

Example2 (Death Benefit Only)

7.4 Fully discrete Reserves

z

An insurance product is fully discrete if it has annual premium payments and benefits are paid at the end of the year of death. The loss function in this case is:
k

L=v

( K ( x ) k ) +1

Px a ( K ( x ) k )+1

ii

Taking the expected value gives

k x

V = E[ k L | K ( x ) = k , k + 1, k + 2,...] ii = Ax + k Pk a x + k

Example1 (Fully discrete)

Example2 (Fully discrete)

Example3 (Fully discrete)

7.5 Benefit Reserves on a Semi-Continuous Basis

z

This product has an annual premium, but the benefit is paid at the moment of death. Fully continuous h t V ( A x:n ) = A x + t : n t h P ( A x : n ) a x + t : h t t h < n Fully discrete
h k x:n

= Ax + k : n k h Px:n a x + k : h k k h < n
ii

ii

Semi continuous
h k

V ( A x:n ) = A x + k : n k h P ( A x : n ) a x + k : h k k h < n

Example (semi-continuous)

7.6 Benefit Reserves Based on True m-thly Benefit premiums

z

Remember true m-thly premiums? We now need to be able to incorporate those into reserve formulas.
h (m) k x:n

m) = Ax + k : n k h Px(:n a x+k : hk k < h

ii ( m )

It is a pain to even write that formula down, but note that the only real change from the analogous fully discrete formula is the addition of the (m) notation. It does make the point though, that you need to be comfortable with the idea of m-thly premiums, annuities, and reserves