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View Full Version : 8GM- Claim Liabs/Reserves vs. Active Life Reserves


Not Mike
10-18-2002, 03:25 PM
OK, I understand the difference, but isn't there some overlap between them?

I mean, if I'm reserving premiums for "active lives" to pay future claims, and then someone has a claim (and therefore a claim reserve is needed), isn't that active life reserve going to cover my claim liability (reserve)...

Maybe it's just the used of the term "claim reserve" that is making it confusing, as they are making it seem like something in addition....

julieml
10-18-2002, 04:20 PM
When somebody becomes disabled, a new reserve (the claim reserve) is set up. This person will still need an active life reserve to cover the possibility of recovering, then becoming disabled again. The claim reserve which is set up at the time of disability is very,very large compared to the ALR because it basically serves as an annuity for the disabled person, which could continue for several years. If the active life reserve was transformed into a claim reserve, it wouldn't be big enough to cover the claim.

Not Mike
10-18-2002, 04:56 PM
Rainson, that kind of makes sense to me. That would imply no "overlap" when reserves are stated, but also cover the fact that the reserves that were being set aside ARE being used to cover those claims.

I also understand what you're saying, julie (about the size of the reserves).

I think that kind of answers my question, the reading just almost made it seem like there were "claim reserves" that are completely independent of active life reserves.

Thinking of a "perfect" scenario in which experience identically matches pricing, the active life reserves would fully pay for all claims ever incurred. If claim reserves were set up IN ADDITION TO active life reserves, then there would be over-reserving (if there was no shifting)... as long as there is "shifting" everything makes sense to me.

Phil
10-18-2002, 05:20 PM
If the active life reserve was transformed into a claim reserve, it wouldn't be big enough to cover the claim.

So do the active life reserves implicitly include an estimate of the claims reserves? I guess they must. "Contract reserve" must refer to the expected $ amt payable upon a claim times the probability of there being a claim.

Once the claim occurs, the "claim reserve" is created using up-to-date information.

Thanks, guys. I've been wondering about this myself for some time now. Your postings really helped me.

Gandalf
10-18-2002, 06:15 PM
Thinking of a "perfect" scenario in which experience identically matches pricing, the active life reserves would fully pay for all claims ever incurred. If claim reserves were set up IN ADDITION TO active life reserves, then there would be over-reserving (if there was no shifting)... as long as there is "shifting" everything makes sense to me.

So do the active life reserves implicitly include an estimate of the claims reserves? I guess they must. "Contract reserve" must refer to the expected $ amt payable upon a claim times the probability of there being a claim.

The active life reserves reflect an estimate of the claims reserves that will eventually be set up.

The active life reserves plus the future net premiums and interest earned would fully pay for all future claims ever incurred.

As with the old course 150, contract reserves can be viewed as present value of expected future claims - present value of expected future net premiums. (where future claims means the claim event ,e.g. disability, occurs in the future. Future payments where the claim event occurred in the past are part of claims reserves.)

Not Mike
10-18-2002, 06:53 PM
Ahhh, the light has come on for me... thanks Gandalf...

The key word is FUTURE for Active Life reserves... if the claim has already happened, their will be a claim liability (reserve), but for PV future claims, you need an active life reserve.

Question, is V_sub_x an "accepted" abbreviation for reserve. I've used this forever (probably stemming from some 150 notation), but I don't think I've ever seen anyone else use it. I don't want to confuse any graders....

Double High C
10-18-2002, 08:28 PM
So do the active life reserves implicitly include an estimate of the claims reserves? I guess they must. "Contract reserve" must refer to the expected $ amt payable upon a claim times the probability of there being a claim.

The active life reserves reflect an estimate of the claims reserves that will eventually be set up.

The active life reserves plus the future net premiums and interest earned would fully pay for all future claims ever incurred.

One qualification (which may be obvious) is that for most yearly renewable term type of group health / disability products, the active life reserve would only cover claim reserves (that will eventually be set up) for claims that will have been incurred before the end of the current year (assuming e.g. no rate guarantees, and no "prefunding"). This is true because active life reserves for claims to be incurred after the current year should be covered by premiums to be paid in future years.

(This is equivalent to saying that the portion of the active life reserve that is attributable to claims to be incurred in future policy years is zero, because the PV of future active life NPs is equal to the PV of future incurred claims.)