Chapter 6 – Reserves

Example 1

On 1 January 2000, a life aged 40 purchased a whole life insurance with sum insured $100,000 payable
at the end of the year of death and annual (gross) premiums payable throughout the term.

The premium basis is:

⑤×
Survival model: Standard Ultimate Life Table
1-Axd
=

A40  0.12106 A55  0.23524 A57  0.25613

Interest: 5% per year

Expenses: 50% of the first premium and 10% of all subsequent premiums. $100 on payment of the sum
insured.

(a) Calculate the annual (gross) premium. Tai Gyo boilers annual gross premium for ( 401

Using equivalence principle :

F- PV of premiums =
EPV of benefits + EPV of expense

Gaol no
) =
100000 ( Ayo ) +
0.1840 ( d ↳ )
'

t
0.4640 +
100
Ayo
o

Gyo =
100000ft =
747.48
0.9 -

0.4
↳o

(b) At 1 January 2015, how much money does the life office need in respect of this policy?

Fu

1/1/2000 1/1/2001 1/1/2015

NO 41 55
0 I 15

EPV of future
premiums f valued at )
age 55 =

Guo .

Is, =

747.48 ( 16.05996 )
=
12004.5

EPV of future benefit 100000A 55

expense 0.1640 ( Iss )
t +
100A 55
=
-1

braved at 55 )
age =
24747.97
Reserve
ra
Now the life office need money =
124747.97 12004.5 =
12743.47
#
-
 GPU =

gross premium reserve

Important points:

 When a group of policies is issued to lives aged x, the future premiums are expected to be
sufficient to provide the future (benefits + expenses).

 At any later time, t , after the policies have been issued, the future premiums may not be
expected to provide the future (benefits + expenses) for the policies still in force.

 The amount the office needs at time t is the reserve (sometimes known as the prospective
reserve or retrospective reserve).

 There are two types of reserve: gross and net premium reserves.

 tVx is the notation for reserve at time t (at the end of year t ) for a life aged x .

 Prospective reserve at time t is the difference of the present value to time t of the future
(benefits + expenses) paid less the future premiums received.

 Retrospective reserve at time t is the difference of the accumulation to time t of the past
premiums less any past (benefits + expenses) paid.

Definitions:
•
eisssiuonoidvr.no
1. The gross premium reserve per policy in force at time t , is calculated as follows:

tVx EPV at t of future (benefits + expenses) EPV at t of future premiums

1- Vx =
EAV at t of past premiums received -

EAV at t of past C. benefit +

↳
Retrospective expense ) paid
 The premium used in this calculation is the actual premium payable by the policyholder.

paranoid Erie
2. The net premium reserve per policy in force at time t , is calculated as follows:

tVx EPV at t of future benefits EPV at t of future premiums

Vx EAV at t of past received of past benefit

c- premiums EAV at t paid
=
-

↳
Retrospective
 The premium used in this calculation is the net premium calculated on the net premium basis,
which may not be the premium payable by the policyholder.

 A net premium reserve is a special case of a gross premium reserve: No expenses and premium
calculated on the net premium basis.

2
 1/1/2000 1/1/2017

① 40 640 640 640

' •
Age
"

Example 2
↳ 17N
40

Calculate the reserves for the policy in Example 1 at 1 January 2017 just before the premium then due
is paid and just after the premium is paid.

(a) The gross premium reserve using the premium basis in Example 1.

1740 ( before ) = EPV of future ( benefit +

expense )
-

EPV of future premiums

D- 57=0-25613
=
100000A 57
+
0.1840 57
't 100A
57
-

640 '

57

say
=
15.62127
=
100100 Asf -

0.9640 15129.68
640
=

57
747.48
=
-

of
£57 -
t

17 Vito ( after ) 100000A 57 0.1640 257 A- 57

Guo
t
100
.

=
+

257
- '

=
15802.42

HV ( after )
pavao ( before ) 0.9840
-

672.74
=
=

(b) The net premium reserve using the basis:

Survival model: Standard Ultimate Life Table

A40  0.12106 A55  0.23524 A57  0.25613

Interest: 5% per year

Bai Pyo bides annual net for ( 40 )

premium

EPV of premiums EPV of

=

benefits

Pho ⑤
yo
=
100000 Ayo

pyo = 100000M€ =
655.88
40

17 Vno ( before ) Azz

100000
pyo Egg
=

15367.32
-
.
=

17 Vno ( after ) =
100000 Afp -

Pyo ayy .

=
16023.20

17% ( after ) -

,yV↳o ( before3) =

Pho =
655.88
 Example 3

Consider a whole life insurance with sum insured $100,000, payable at the end of the year of death,
issued to a life aged 40. Premiums are payable annually throughout life.

The basis for calculating the premium and gross premium reserve is:

Survival model: Standard Ultimate Life Table

A40  0.12106 A60  0.29028 A61  0.30243

Interest: 5% per year

Expenses: 5% of each gross premium and $100 when the sum insured is paid.

(a) Calculate the gross premium.

QOVHO
(b) Calculate the gross premium reserve at the end of the 20th year.

(c) Calculate the gross premium reserve at the end of the 21st year. 2h40 #

l
Aho
⑨ Pai Guo
-
=

no
bailar annual gross premium for ( 40 ) -

d
EPV of of
premiums =
EPV benefits + EPV of expense

640 Iwo'
=
100000A 40 t
0.05640 no
+ 100A 40

640 = 100100
-
Ayo = 691.09
0.95
40

⑧ 640 640 640 ' a .

Fi Age
40 41 59 60 61 62

O l 19 21 22 14.90412
2-0
'

go

↳ 2040
LOV no Abo
100000
05640 Abo Gyo
=
t O t 100 -
.

fo
-

60

=
100100 Abo -

0.95840 Joo 19271.94

.

② Guo Gao . . .

bin Age
40 41 59 60 61 62

O l 19 20 21 22
Ts 21 ✓ 40

21 Vito =
100100 Ab , +
0.05640 61
-

Guo -

by
=
20655.67

4
 Example 4

A woman aged 60 purchases a 20-year endowment insurance with a sum insured of $100,000 payable
at the end of the year of death or on survival to age 80, whichever occurs first. An annual premium of
$5,200 is payable for at most 10 years. The insurer uses the following basis for the calculation of
reserves:
Interest: 5% per year
Expenses: 10% of the first premium, 5% of subsequent premiums, and $200 on payment of the sum
insured.
a60:10 7.9601 a65:5 4.4889 a66:4 3.6851

A60:20 0.41004 A65:15 0.51140 A66:14 0.53422

A70:10 0.63576
pedals'£mshobJioons£as
Calculate the gross premium reserves 0V , 5V , 6V , 10V and 20V .

5200 5200 5200 5200 Age

to
60 61 62 . . .

69 70 71 . . . 79 80

I
ovbo =

100000 Abo 207+0.0515200 ) +

0.0515200) +200A 60,207 5200
,o7
-

:
go ,
go : ,o7

=
2023.114
5200 5200 5200 5200 5200

in
# Age
60 61 62 63 64 65 66 67 68 69 70 71 7980

↳r5Vb0
b- Vbo =
100000 Afg 157 0.0515200 )
Abs :p
+
-1200
( dibs )
:
-

5200
: 57
=
29067.114

5200 5200 5200 5200

Its Age
60 61 62 63 64 65 66 67 68 69 70 71 7980
↳ Hbo
bVbo =
100200 Abb :
147 +
0.0515200 ) Joo : 47
-

5200
66,47
=
35324.45

IOVBO =
100200 Ayo : 107
=
63703.152

11 Ufo = 100200 Ayy :q7

:

5
y

do Vbo =
100200 Ago :o7 = 100200.8 .

Pgo
 Example 5

For a fully discrete 20-year term policy on (45) with sum insured 1000:
 First year expenses are 50% of first year premium plus 20.
 Renewal expenses are 3% of premium plus 5.
 Expenses are paid at the beginning of the year.
 The gross premium is calculated using the equivalence principle with the following premium
basis:
 q45 k  0.01 , 0  k  19 tae 645 bakes annual
gross premium for ( 45 )
 i  0.04
 The reserve basis is
 q45 k  0.008 , 0  k  19
 i  0.05

Calculate the gross premium reserves at time 0 and 10.

BB'd @ bbarq premium basis

Gj 45%07
=
1000 Aig
'

: 207
+
( 03645 5)
O -
t
us :so7
+
( 0.47645+15 )

@ ↳, =
l000A¥:2o7+5£45:2T- =
16.88
0.97 0.47
45.207
-

"

207
or kPa
=

45
'
:
,

=
I +
opus .
+
Tapas -1
. . .
-187g Pus .

19

=i+l9÷l+l9÷uI+
;f÷!÷÷
"

. .
.tl :÷ul =
=
B. 03573
,
A 's A 20€45
=
-

4 i. 20 45 : 270

20
↳ g. joy
=
1-A45.IO#
=
0.498626 -

(96914 ) =
0.125344 d

#
A

( 0364g
A
OV 45 ) ( O 4764£15 )
. .

Aig
.

Gus
.

aus
'

1000 5
=
+ O t +
: 207
-

: 207
-
- '

aus 207 :

"

Is :sa= 1+(9%37) -1

.
. .
+
(978151 =

12.29301

Au's : 207
=
A:S : 207
-

go Eats =
0.414618 -

( 9%7%0 = 0.093661

.→:÷÷:::÷:
oV↳g=-23.234#

or 6
 Example 6

For a fully discrete twenty-year endowment insurance of 1000 on (40), you are given:
Bai Pao betas annual net premium

Pyo .

yo : 207
=
1000 Ayo : 207
=
1000 ( Auto : 207
+
so
F-
↳o )

Rio =
35.71

Rio Rio Rio Rio Rio Rio Rio Bo p40

•
Age
40 41 42 43 44 45 46 47 59 BO

b
b- V' 40
Calculate the net premium reserve at time 5.

b- Vito = 1000A 45 157:

-

Rio .

45 : 157

ME'o

b- Vito =
Rio .

40,57 .ie#R.o

7
 Example 6

For a fully discrete twenty-year endowment insurance of 1000 on (40), you are given:

ให้ Ono its annual netpremium

Pao. Quoice) = 1,000Aprica

=1,000 ( Apricot + j
ad
P40 = 35.7 1

#- Pro
Personnes. . . . . (30 183
↓

5V 40

Calculate the net premium reserve at time 5.

สี หม :1,000Au5: - Pao G45:

-อ
A
Vao:Puo- dur:2
↓
หรื อ
SPOTAnoinEur nEx: V" nPe x? : f

== 137. 1243

nExaccumulation factor

7
 Example 7

For a fully continuous whole life insurance on (40), you are given:
get
 The level annual premium is 66, payable for the first twenty years.
 The death benefit is 2000 for the first twenty years and 1000 thereafter.
   0.06
 1000 A50  333.33 bb bb 66 66

 1000 A 1  197.81
1-
to It Is 5h to di Ia Age
40 . . .
. . .

50:10
---

 1000 10 E50  406.57 SA =

2000 SA -
-
1000

Calculate the net premium reserve for this insurance at time 10.

to Uyo =
2000 A' Io 107
t 1000 # 50 -

66550
:
pop : 107

=
, ooo ftso + 1000 # to :B -

" ②
50 :

Nigg F-
F.
+

,
, ,oy ① so
= 95.958 I
i-Aso
S

8
Example 8

For a fully continuous whole life insurance of 1 on (x), you are given:
 x  k t   for t  0
 t   for t  0
  P  0.03
  P  0.07
P is the annual premium.

Calculate tVx .

the = A' * t
-

P .

Ex it
ah
-

uh
-

are
-

me u
=

! e- Stop put ,
on . teh+
dk -

P .

To e-
St
.

hP×+f dk

-
-

att -

Prats )
= U - P
-

Mt 8

= 0.03
-

O .
1

=
0.3
It

9
Asset shares:

 The reserve at duration t represents the cash the insurance company needs at time t in respect
of a policy still in force.

 The asset share at duration t represents the cash the insurance company actually has at time t
in respect of a policy still in force.

 The asset share is the accumulation to time t of past premiums received minus past claims and
past expenses paid.

 The asset share is calculated assuming the policy being considered is one of a large number, N
, of identical policies issued simultaneously:

-
Asset share = total accumulated funds/number of survivors

 (1) If the premium is calculated using the equivalence principle, (2) if the premium basis = the
reserve basis and (3) if the past experience of the group of policies (survival, interest, expenses,
bonus) is as assumed in this common basis, then:

o
Asset share = Reserves

Ast asset share at time t ( end of year t )

10
Example 9

A life office sells a 10-year endowment policy to a life aged exactly 60. The sum insured of $100,000
is payable at the end of the year of death or on survival to age 70.

Level premiums are payable annually in advance throughout the term of the policy.

Survival model: Standard Ultimate Life Table

Abo :
107
=
0.62116

Interest: 5% per year

A 63 : 77
=
0.715297
Expenses: 10% of each gross premium

(a) Calculate the gross premium reserve at the start of the 4-th year. 3% = ?
w w w. u w w w w

Cobo .

bo : 107
=
100000 Abo : 107
+
0.1660 go :D

100000A
Goo =

-
60 : 107
=
8675.50
0.9
60 : 107

gtfo =
100000 Afg : 77
+
0.1 ( 8675.50 ) 63 :p
-

8675.50
by : 77

24847.84
=

11
 AS = ?
,

(b) Calculate the asset share at the start of the 4-th year assuming that in the first 3 years:

Interest has been 7.5% per year

The rate of mortality (for similar policies) has been qx 0.015

Expenses were 15% of the premiums in the first three years.

Consider N indentical policies issued simultaneously

At t Premiums
O
received minus ( 8675.50 )
-

;
expense
-

=
0.85 N

=
7374N

At the end of 1st year ;

Accumulated premiums =
7374N ( 1.0757 = 7927

Accumulated premiums minus death benefit paid =

7927 -

10000010.0151N
I t
Total asset at end of 1st year = 6427 N

AS , =
64272 = 6525
N -

0.015N

year Asset at beginning Cash flow at Asset

of beginning of year
year

12
 9
ASg:
(b) Calculate the asset share at the start of the 4-th year assuming that in the first 3 years:

Interest has been 7.5% per year

The rate of mortality (for similar policies) has been qx 0.015

Expenses were 15% of the premiums in the first three years.

Consider N identical policies issued simultaneously

At teo; Premiums received a expenses I 0.85( 8675.50) N

N
== 9,375

At the end of 15
year;

Accumulated premiums = 7,37IN ( 1.093)

Accumulated premiums & death benefits
paid = 1927N - 100,000(0.015) N
-
Total assets at end of 1 year =6,427 N

AS #N = 6,525
N- 0.015 N

(
~
No. of policy inforce at end of 1 year

0.985 N

Fund)
Hear Asset at Cash flow Asset at end Death benefits Total asser at No. of policies in force ASy
beginning at

end of year SUNVIVONG

Of
year beginning of of year, paid at end

Year before of year

0.052675.50N 9.374 N ( 1.095) 100,000 (0.015N 7927N- 1500 N 0.985N

I -

#N =
6,523

:= 7,927 N == 1,500 == 6,4127 N

=- 7,344 N

2 0.85(8675.5) (0.985N) C6427N + 7264N) 100,000(0.011)

0.985N
#DON -
1LL7I8N - 147ON 13,64,

N
1 0.98
+

1 1.075 5 N
= 13,248
:121,918N == 1,478 N

21,925N - 1,455 M 0.985' N

3 13,240 N 0.85 (8675.5) ( 0.985PN) ((13.24ON + 7155 NS
x 1,075
100,000 (0.015)
1 CO. 985' N) == 20,470N
#RON = 21,119
== 7,155N
N
=21,925 = 1,455 N

12
Example 10

For a discrete whole life of 1000 on (x), you are given:

 AS9  28.42

 qx( d9)  0.002

 qx( w9)  0.06

 The cash value at the end of the tenth year is 70.
 i  0.05
 The gross premium paid at the beginning of year is 22.
 Expenses are 50% of premium plus 40 in the first year, 5% of renewal premium plus 3 in
renewal years.

Calculate the asset share at time 10.

13
Example 11

For a fully discrete whole life insurance of 1000 on (45), you are given:

 Mortality follows the Illustrative Life Table.

 10% of all lives surviving to the beginning of a policy year withdraw during the year. All
withdrawals occur at the end of the year.
 Cash values are 0 in the first year, 12 in the second year.
 Expenses, payable at the beginning of the year, are:
Percent of premium Per policy
First year 55% 30
Renewal year 5% 2
 AS 2  10

 i  0.10

Calculate the gross premium, G.

14