Modified Reserve Methods
Definition of "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
Approach that maintains injury or sickness begins when it is first detected by an obvious appearance. This argument is used in determining if liability insurance is afforded in a particular ...
Coverage in the event a school, summer camp, or similar operation suffers loss of tuition because a peril destroys a building. The tuition form reimburses the institution for loss of ...
Fund from which losses are paid for the insolvent members of Lloyd's of London. Each year, members of Lloyd's of London contribute a percentage of their premium volume to this fund to act ...
Performance of management functions associated with administering an employee benefit insurance plan, to include actuarial services, booklet and contract plan designing, billing, ...
Primary responsibility for overseeing the insurance industry that has rested with individual states since 1945, after Congress passed the MCCARRAN-FERGUSON ACT (PUBLIC LAW 15). In addition ...
State in which an insurance company has its principal legal residence; where an individual resides in a fixed permanent home. ...
Law that places limitations on an uninsured motor vehicle owner or motor vehicle operator's ability to recover damages in the event of a motor vehicle accident. The state of Louisiana ...
Income payable to a surviving spouse or other beneficiary upon the death of the primary wage earner to bridge the gap until the beneficiary is self-sufficient. For example, income can be ...
Total of net investment income plus underwriting income plus other miscellaneous income. This type of income is an indication of how the underwriting function and the investment function of ...
Have a question or comment?
We're here to help.