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
actual fire losses divided by the total value of the property exposed to the peril of fire; actual losses resulting from fire divided by the total fire amount of in-force business. ...
Coverage for damage to a building or its contents due to the weight of these elements. Outdoor property such as patios, swimming pools, and sidewalks are usually excluded. ...
tort against another person's property, designed to detain or dispose of it in a wrongful manner. For example, wrongful selling of another person's automobile without permission would ...
Coverage for present and past U.S. uniformed services members under one of these programs: United States Government Life Insurance (USGLI) established in 1919 to provide RENEWABLE TERM LIFE ...
Health insurance contract sold to an individual to provide coverage for medical expenses. Contrast with group health insurance. ...
Effort of a poor risk to seek insurance coverage. The onset of a health problem such as heart disease, for example, may prompt a person to apply for life insurance before seeking medical ...
Federal act composed of amendments to the Product Liability Risk Retention Act of 1981 and enacted to make the procedures more efficient for creating risk retention groups (capitalized, ...
Undiscounted loss reserves that must be maintained by property and casualty insurance companies in an adequate amount to provide for the payment of the settlement value of the outstanding ...
Endorsement to personal automobile policy (PAP) that covers an insured involved in a collision with a driver who does not have liability insurance. ...
Have a question or comment?
We're here to help.