In this module, we introduce the intrinsic worth of a life insurance policy, known as a policy value. Policy values may be used to determine
- reserves, estimates of the future liability associated with a policy,
- asset shares, the share of the insurer’s assets attributable to a policy, and
- cash flow analysis, to determine the profitability of a policy.
Policy values are a direct function of premiums and so can be also useful in the premium determination process. Incorporating expenses brings a touch of reality into policy valuation methods.
Policy value concepts can be used for many different types of policies. This module examines cases where the policy is
- “fully continuous,” in that premiums are payable continuously and benefits are payable at the moment of failure,
- “fully discrete,” in that premiums are payable annually and benefits are payable at the end of the year of failure, and
- other modes, such as mixtures of continuous and discrete payment times as well as other than annual cash flows.
Changes in policy values may be also interpreted as expenses for an insurer. Thus, this module examines changes both discretely and continuously. Special reserving methods, known as modified premium reserves, are introduced to account for large initial acquisition expenses.