Deficiency Reserves
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, deficiencies may exist
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.
SOA Webcast Notes
The SOA hosted a webcast on March 11, 2009 titled “Actuarial Guideline CCC will
Have on ROP Term”. The SOA has released a Q and A from this webcast. You may read
the Q and A’s by clicking here.