Dave Kester said:
On 10/23/2008 5:02:27 PM
When calculating deficiency reserves using XXX, the basic reserve determines whether the unitary or segmented approach will be used. The approach that produces the largest basic reserve will be the approach that will be used to determine deficiency reserves
Assume that you are calculating the reserves for a term policy that has level premiums for 10 years and annually increasing thereafter. For this policy, if the segmented method produces the largest basic reserve, then it will be used to determine the deficiency reserve. It is tempting to only consider the deficiencies for the first 10 years when calculating the deficiency reserve. However, there could exist deficiencies after the first 10 years that still need to be added to the deficiency reserve. If that is true, then the deficiency reserve for this policy will be greater than the deficiency reserve for a similar policy except the benefits only last for 10 years. The tricky part is that the segmentation only determines how to calculate the net premiums. However, regardless of whether the segmentation or the unitary approach is used, the deficiency reserve must be calculated for the entire term of the policy.
{Note - this is copied from the Salt Crystals newsletter - issue #1}