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Old 02-28-2018, 10:26 PM
Prozzak Prozzak is offline
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Default Gross Premium Reserve

Hi all quick question as I have confused myself entirely dealing with gross premium reserves and basically just the concept of reserves in general.

Gross premium reserve is defined as PV Future Benefits + PV Future Expenses - PV Future premiums.

I understand that this can be negative at the start of a policy (so t=0) however from that point on I get lost.

Why does the graph generally slope upwards at this point? Is this because premiums are dissipating quicker than claims (benefits) and expenses at the start of the contract and then the slope downward occurs because claims have increased?

Further, for statutory reserves we want the reserve to be greater than the gross premium reserve. Why? This is my main issue at the moment. Wouldn't we want the reserve to be negative meaning that we are receiving more premiums than we are expending on benefits and expenses. Why would we want stat/regulatory reserves to be positive? I just cannot wrap my head around this part for some reason. Or is it more that we do not "want" this but more we set our assumptions for this so that the company knows we need x amount of reserve extra in case things go really poorly.
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Old 02-28-2018, 11:04 PM
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Ranger Ranger is offline
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at the end of the policy (or reserve period) the reserve always equals 0. always. There are no more future premiums, no more future benefits. If the GP reserve starts out negative, as t increases, there are less future benefits, less future premiums, the reserve will be less negative. At the end of time, the reserve has to be 0. always

Gross premium reserves are "reality". " realistic" mortality assumptions, "realistic" discount rate, "realistic" lapses, "realistic expenses". I put realism in quotes because there is usually so sort of margin or PfAD for conservatism, but for the most part, it much closer to reality than other types of reserves.

statutory reserve have nothing to do with realism. The mortality assumption isn't realistic. The discount isn't realistic. There is no assumption for lapses. Statutory reserves are meant to be conservative. They are designed to be positive. They are not designed to determine the value of a block of business. (i.e. they are not designed so that negative reserve means future premiums are greater than future claims which is a good thing) They exist to create large liabilities which have to be supported by large assets so that the Balance Sheet is conservative. In a SHTF situation, the state insurance commissioner wants there to be plenty of assets available to help remedy the situation.
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Old 03-01-2018, 09:13 AM
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Carol Marler
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up to a point.
Of course under PBR, most of the objections to formula-based stat reserves are less applicable, or perhaps not applicable at all.
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Old 03-01-2018, 11:08 AM
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Quote:
Originally Posted by Prozzak View Post
Gross premium reserve is defined as PV Future Benefits + PV Future Expenses - PV Future premiums.
For clarity, it should say "PV Future Gross premiums", to distinguish from "PV Future Net premiums". It's an important distinction.
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