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Mathematical Reserves

Mathematical reserves are provisions made by insurance firms to cover future long-term insurance liabilities. Actuarial reserves are set aside to cover future insurance liabilities and are equal to the present value of future cash flows from insurance policies. Regulated insurers must keep assets to offset this future liability. To compute actuarial reserves, expected future claims are discounted based on investment earnings assumptions to determine the present value of claims in each period, which are then summed to calculate total reserves.

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41 views1 page

Mathematical Reserves

Mathematical reserves are provisions made by insurance firms to cover future long-term insurance liabilities. Actuarial reserves are set aside to cover future insurance liabilities and are equal to the present value of future cash flows from insurance policies. Regulated insurers must keep assets to offset this future liability. To compute actuarial reserves, expected future claims are discounted based on investment earnings assumptions to determine the present value of claims in each period, which are then summed to calculate total reserves.

Uploaded by

Pavan SAMEER KUMAR
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Mathematical reserves

The provision made by an insurance firm to cover liabilities (excluding liabilities which have fallen due)
arising under or in connection with contracts for long term insurance business.

In insurance, an actuarial reserve is a reserve set aside for future insurance liabilities. It is generally
equal to the actuarial present value of the future cash flows of a contingent event. In the insurance
context an actuarial reserve is the present value of the future cash flows of an insurance policy and
the total liability of the insurer is the sum of the actuarial reserves for every individual policy.
Regulated insurers are required to keep offsetting assets to pay off this future liability.

Computation of actuarial reserves

The calculation process often involves a number of assumptions, particularly in relation to future
claims experience, and investment earnings potential. Generally, the computation involves
calculating the expected claims for each future time period. These expected future cash outflows are
then discounted to reflect interest to the date of the expected cash flow.

For example, if we expect to pay $300,000 in Year 1, $200,000 in year 2 and $150,000 in Year 3, and
we are able to invest reserves to earn 8%p.a., the respective contributions to Actuarial Reserves are:

Year 1: $300,000 × (1.08)−1 = $277,777.78

Year 2: $200,000 × (1.08)−2 = $171,467.76

Year 3: $150,000 × (1.08)−3 = $119,074.84.

If we sum the discounted expected claims over all years in which a claim could be experienced, we
have completed the computation of Actuarial Reserves. In the above example, if there were no
expected future claims after year 3, our computation would give Actuarial Reserves of $568,320.38.

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