Actuarial reserves - Citizendia

An actuarial reserve is a liability equal to the present value of the future expected cash flows of a contingent event. Present value is the value on a given date of a future payment or series of future payments discounted to reflect the Time value of money and other factors such as Investment In the insurance context an actuarial reserve is the present value of the future cash flows of an insurance policy and the total liability of the insurer is the sum of the actuarial reserves for every individual policy. An insurer must keep offsetting assets to pay off this future liability.

The Loss Random Variable

The loss random variable is the starting point in the determination of any type of actuarial reserve calculation. A random variable is a rigorously defined mathematical entity used mainly to describe Chance and Probability in a mathematical way Define $K (x)$ to be the future curtate lifetime random variable of a person aged x. Then, for a death benefit of one dollar and premium $P$ , the loss random variable, $L$ , can be written in actuarial notation as a function of $K (x)$

$L = v^{K(x)+1} - P\ddot{a}_{\overline{K(x)+1}|}$

From this we can see that the present value of the loss to the insurance company now if the person dies in t years, is equal to the present value of the death benefit minus the present value of the premiums. Actuarial notation is a shorthand method to allow actuaries to record mathematical formulas that deal with interest rates and Life tables.

The loss random variable described above only defines the loss at issue. For K(x)>t, the loss random variable at time t can be defined as:

${}_{t}L = v^{K(x)+1-t} - P\ddot{a}_{\overline{K(x)+1-t|}}$

Net Level Premium Reserves

Net level premium reserves, also called benefit reserves, only involve two cash flows and are used for some USGAAP reporting purposes. In the US, generally accepted accounting principles, commonly abbreviated as US GAAP or simply GAAP, are accounting rules used to prepare present The valuation premium in an NLP reserve is a premium such that the value of the reserve at time zero is equal to zero. The net level premium reserve is found by taking the expected value of the loss random variable defined above. They can be formulated prospectively or retrospectively. The amount of prospective reserves at a point in time is derived by subtracting the actuarial present value of future valuation premiums from the actuarial present value of the future insurance benefits. In Actuarial science, the actuarial present value of a payment or series of payments which are Random variables is the Expected value of the Present Retrospective reserving subtracts accumulated value of benefits from accumulated value of valuation premiums as of a point in time. The two methods yield identical results.

As an example, consider a whole life insurance policy of one dollar issues on (x) with yearly premiums paid at the start of the year and death benefit paid at the end of the year. In actuarial notation, a benefit reserve is denoted as V. Our objective is to find the value of the net level premium reserve at time t. First we define the loss random variable at time zero for this policy. Hence

$L = v^{K(x)+1} - P\ddot{a}_{\overline{K(x)+1|}}$

Then, taking expected values we have:

$\operatorname{E}[L] = \operatorname{E}[v^{K(x)+1} - P\ddot{a}_{\overline{K(x)+1|}}]$

$\operatorname{E}[L] = \operatorname{E}[v^{K(x)+1}] - P\operatorname{E}[\ddot{a}_{\overline{K(x)+1|}}]$

${}_0\!V_x=A_{x}-P\cdot\ddot{a}_{x}$

Setting the reserve equal to zero and solving for P yields:

$P=\frac{A_{x}}{\ddot{a}_{x}}$

For a whole life policy as defined above the premium is denoted as $P x$ in actuarial notation. The NLP reserve at time t is the expected value of the loss random variable at time t given K(x)>t

${}_{t}L = v^{K(x)+1-t} - P_{x}\ddot{a}_{\overline{K(x)+1-t|}}$

$\operatorname{E}[{}_{t}L|K(x)>t] = \operatorname{E}[v^{K(x)+1-t}|K(x)>t] - P_{x}\operatorname{E}[\ddot{a}_{\overline{K(x)+1-t|}}|K(x)>t]$

${}_t\!V_x=A_{x+t}-P_x\cdot\ddot{a}_{x+t}$ Where ${ }P_x=\frac{A_{x}}{\ddot{a}_{x}}$

The Loss Random Variable

Net Level Premium Reserves

See also