Professional Documents
Culture Documents
and
Solvency
Margin
Objectives
Reserves
Need to Reserve
Principles of Reserving
Types of Reserves & Methodologies
Reserving Assumptions
Solvency Margin
Regulations
Reserves
Prudent
Reserve calculation
Interest rate (take account of currencies, yields and reinvestment yields on assets)
Valuation and not best estimate, so basis should contain margins
assumptions like demographic, withdrawal and expense
Allow for
guaranteed benefits, including guaranteed surrender values
declared and future bonuses,
options available to policyholders,
expenses, including commissions
future premiums if contractually due to be paid,
approximations and generalisations
Valuation of liabilities consistent with asset valuation (nature, term and method)
Principles of Reserving
If no explicit allowance made for future bonuses then must be allowed for
implicitly by suitable adjustment to valuation interest rate
If valuation method itself defines the amount of expenses assumed then the
amount implied must be no less than a prudent estimate of the relevant
expenses.
Need to Reserve
Probability of
benefit
payment in
the initial
years is small
Premiums
received in early
Prevents an years are more
insurer from
than enough to
becoming
insolvent. pay benefits that
fall due in those
years
So it is prudent
Ensures that to create
the insurer reserves, to
meets its fund shortfall in
future contract later years of
obligations. contract.
Need to Reserve
During the initial years of the policy, premium paid is in excess of the claim payments while
in later years they fall short. Hence, the need to Reserve arises.
Term Assurance
5,000
4,500
4,000
3,500
3,000
Reserves 2,500
2,000
1,500
1,000
500
-
35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65
Time
This methodology does not consider expenses and hence gives Benefit
reserves.
FullPreliminary Term Method
In order to
- include expenses in reserve calculation &
- address negative net income issue at the end of the first
policy year caused by heavy first year expenses for
underwriting
Life insurance companies came up with FullPreliminary Term
Method (FPT).
This method (e.g., Whole Life Age 55 )
-We would consider it as a sum of 1 year Term Insurance & a
Whole Life Age 56
Commissioners Reserve Valuation Method (CRVM)
Solvency Margin
Solvency Capital Requirement
Regulations Regulatory Authorities
Regulations Acts Governing Insurance
Regulations of Insurance by IRDA
Solvency II