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
Coverage for golf clubs and golf equipment on an all risks basis subject to exclusions of wear and tear, war, and nuclear disaster. Location of coverage is a clubhouse locker or any other ...
Insurance company's total investments in financial securities. ...
Group of insurers or re insurers involved in joint underwriting. Members typically take predetermined shares of premiums, losses, expenses, and profits. Syndicates, more common in ...
Plan in which funds are currently allocated to purchase retirement benefits. An employee is thus assured of receiving retirement payments, even if the employer is no longer in business at ...
Coverage that goes into effect when an individual's claim reaches a specific threshold selected by the employer who has self-insurance. After this threshold is reached, the policy pays ...
Academic publication of the American risk and insurance association in which articles deal with aspects of risk, insurance, and allied fields of study. ...
Costs incurred by an insurance company other than agent commissions and taxes; that is, mainly the administrative expense of running a company. ...
Terms specifying obligations of an insured to keep a policy in force. For example, an insured must pay the premiums due; in life insurance, if death occurs, the beneficiary or the insured's ...
Individuals or organizations covered by property and liability insurance other than the named insured. For example, under the personal automobile policy (pap), other insureds under Coverage ...
Have a question or comment?
We're here to help.