Modified Reserve Methods
Accounting procedures that defer the full funding of a life insurance net level premium reserve to accommodate the policy acquisition cost in the early years of a policy. First-year policy expenses, such as agent commission, medical examination, and premium tax, often result in little of the premium remaining for the premium reserve required under full valuation reserve standards. In such cases, the difference comes out of the insurer's surplus account. To avoid this, two types of modified reserve methods are used: (1) the full preliminary term reserve valuation method, and (2) the modified preliminary term reserve valuation method, better known as the commissioners' reserve valuation method. The full preliminary term method does not require any terminal reserve at the end of the first year and in effect accounts for reserves like term insurance during this period. This leaves more of the premium available to cover acquisition cost and first-year claims. In subsequent years, for reserve accounting purposes, the policy is considered to have been issued one year later than its actual date on an insured who was one year older than his actual age. This results in stepping up additions to the premium reserve, eventually making up for the first year's shortfall.
The commissioners' reserve valuation method limits first-year expenses and thus the amount of deferred funding of policy reserves. Policies whose premiums fall below a certain level can be accounted for under the full preliminary term method. For policies with premiums above that level, the full preliminary term method is modified by a limitation on the amount of expenses that can be used in figuring the schedule of deferred reserve funding.
Popular Insurance Terms
Independent agent membership group, originally mutual agents but today open to both mutual and stock agents. Association views are presented both nationally and locally on insurance ...
Coverage for railroad equipment, liability of a railroad for damaging another railroad's equipment, or the damage to goods under its care, custody, and control. Coverage is provided on an ...
Same as term Application: written statements on a form by a prospective insured about himself, including assets and other personal information. These statements and additional information, ...
Coverage in the event that property is damaged or destroyed so that an insured cannot use the property for its intended purpose. For example, loss of use of a drill press because of ...
Documents completed by the agent to effect authorization to act on behalf of the company. ...
Company formed and operated without the profit motive as its normal business objective; normally sells and services health insurance policies. ...
Systems composed of personal computers linked by a file server. These computers share software as well as databases that enable the risk manager access to information in a quick and ...
Life insurance policy under which its face value is payable only if the insured survives to the end of the stated endowment period; no benefit is paid if the insured dies during the ...
Income paid under health insurance for loss of use of various parts of the body due to an accident. A schedule of benefits available in a policy lists payments for each part of the body ...
Have a question or comment?
We're here to help.