In the business of

insurance Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to hedge ...

, statutory reserves are those assets an insurance company is legally required to maintain on its

balance sheet In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business ...

with respect to the unmatured obligations (i.e., expected future claims) of the company. Statutory reserves are a type of

actuarial reserve 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 p ...

Purpose

Statutory reserves are intended to ensure that insurance companies are able to meet future obligations created by insurance policies. These reserves must be reported in statements filed with insurance regulatory bodies. They are calculated with a certain level of conservatism in order to protect policyholders and beneficiaries.

Methods

There are two types of methods for calculation of statutory reserves. Reserve methodology may be fully prescribed by law, which is often called formula-based reserving. This is in contrast to principles-based reserves, where

actuaries An actuary is a business professional who deals with the measurement and management of risk and uncertainty. The name of the corresponding field is actuarial science. These risks can affect both sides of the balance sheet and require asset man ...

are given latitude to use professional judgement in determining methodology and assumptions for reserve calculation. In the United States, where formula-based reserves are used, the

National Association of Insurance Commissioners The National Association of Insurance Commissioners (NAIC) is the U.S. standard-setting and regulatory support organization created and governed by the chief insurance regulators from the 50 states, the District of Columbia, and five U.S. territo ...

plans to implement principles-based reserves in 2017.

Life insurance in the United States

In the U.S.

life insurance Life insurance (or life assurance, especially in the Commonwealth of Nations) is a contract between an insurance policy holder and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death ...

industry, statutory reserves are most commonly computed using the Commissioner's Reserve Valuation Method, or CRVM, the method prescribed by law for computing minimum required reserves. The size of a CRVM reserve, as with most life reserves, is affected by the age and sex of the insured person, how long the policy for which it is computed has been in force, the plan of insurance offered by the policy, the rate of interest used in the calculation, and the

mortality table In actuarial science and demography, a life table (also called a mortality table or actuarial table) is a table which shows, for each age, what the probability is that a person of that age will die before their next birthday ("probability of deat ...

with which the

actuarial present value The actuarial present value (APV) is the expected value of the present value of a contingent cash flow stream (i.e. a series of payments which may or may not be made). Actuarial present values are typically calculated for the benefit-payment or seri ...

s are computed. The Commissioner's Reserve Valuation Method was itself established by the Standard Valuation Law (SVL), which was created by the NAIC and adopted by the several states shortly after World War II. The first mortality table prescribed by the SVL was the 1941 CSO (Commissioner's Standard Ordinary) table,The 1941 CSO table was prescribed for policies of ''ordinary'' life insurance. For policies of ''industrial'' life insurance the SVL prescribed use of the 1941 CSI (Commissioner's Standard Industrial) table. at a maximum interest rate of 3½%. Subsequent amendments to the Standard Valuation Law have permitted the use of more modern mortality tables and higher rates of interest. The effect of these changes has in general been to reduce the amount of the reserves which life insurance companies are legally required to hold.

Notes

References

*N. L. Bowers, H. U. Gerber, J. C. Hickman, D. A. Jones, & C. J. Nesbitt, ''Actuarial Mathematics'', Society of Actuaries (1986). {{ISBN, 0-938959-10-7

External links