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Reserves

and
Solvency
Margin
Objectives
Reserves
Need to Reserve
Principles of Reserving
Types of Reserves & Methodologies
Reserving Assumptions
Solvency Margin
Regulations
Reserves

Money that an Gives the


Liability equal to insurer sets aside company
the actuarial to meet its future measure of the
Reserves make up
present value of contract minimum funds it
significant portion
the future cash obligations, i.e. needs to hold at
of insurers liability.
flows of a benefits to any point during
contingent event. policyholder, and the term of the
expenses. contract.
Principles of Reserving
Cover all liabilities arising from all contracts

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

No discontinuities in valuation calculations from arbitrary changes to the basis

Valuation bases and methods should be disclosed

Valuation method should recognise profit appropriately over the policies


lifetimes

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

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Time

Expected Loss Premium


Types of Valuation
Statutory:
- required by law
- Used by regulators to assess claims paying ability of a company.
- Uses conservative assumptions and expenses acquisition costs immediately.
GAAP:
- required of publicly traded companies in the United States
- Assumptions often based on experience with margin.
- Acquisition costs are deferred.
Tax:
- performed for the purpose of determining taxable income
- Reserves are less than or equal to statutory reserves.
- Uses best estimate assumptions.
Methods of Reserves calculation

Net Level Premium Reserve Method


FullPreliminary Term Method
Commissioners Reserve Valuation Method (CRVM)
Net Level Premium Reserve Method

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

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