ACTUARIAL PRACTICE FOR LIFE

INSURANCE AND TAKAFUL

ASC600
CHAPTER 1: VALUATION OF LIFE INSURANCE LIABILITIES

DR. NORAZLIANI MD LAZAM

Topics Covered
• VALUATION METHODS
VALUATION METHODS
q Net Level Premium Reserve(NLPR)

• Reserve = (Value of Future Benefits) - (Value of Future Net Premiums)

(Prospective Method: NLPR = APVFB – APVFP)
tV = A – P. ä

• Eg:
• Whole Life : tVx = Ax+t – Px äx+t
• Endowment : tVx:n = Ax+t:n-t – Px:n äx+t:n-t
• where x= age at issue, P = Net Level Premium and;
valuation date is t years since issue.
VALUATION METHODS
q Advantage and disadvantage of NLPR method.

• Advantage: the method specifically excludes all margins from the

premium being valued, other than the margin for interest and
mortality. Thus the problem of capitalizing of future profit margins is
avoided.
• Disadvantage: it overvalues policies that have high initial expenses.
These expenses are paid for by a level additional loading, and by
excluding them, we are treating them as a future liability.
VALUATION METHODS
q Modified Net Premium Reserve

• Non-Par : mod = A – b. ä
tV
S. tVmod = S.A – S.b. Ä

• Par : S.tVmod = (S + B).A – S.b. ä

• where S = sum assured

b = modified net premium
B = vested bonus.
tV
mod = modified net premium reserve.
VALUATION METHODS
q Why do we need to modify the reserve?

• High acquisition cost in the first year

• Required by Malaysian Law, k=n where k is the modified period, n is
the premium paying term.
• To ensure reserve is sufficient to cover for liabilities
VALUATION METHODS
• Let
• the first year modified premium = a
• the renewal premium = b
• the premium paying term = n
• and the modified period = k.
• a is the cost of insurance in the first year:
• a = v.qx
= Cx /Dx
• a < b; b > P
• where P is the level net annual premium
• Under Malaysian Law, although we modify the premiums, the APV of premium P before
modification must be actuarially equivalent to the APV of the modified premiums, ie:
• P äx:k = a + b ax:k-1
VALUATION METHODS
q Under Malaysian Statutory Minimum Reserve Requirement:
• Reserve = Max ( FPT, 3% Zillmer) reserves.
• Table – DGI 1996
• 4% p.a. interest.

Reference – Insurance Act 1996(ACT553), Part XIII Valuation of Life

Business Liabilities, Section 57 Minimum Valuation Basis, pg 181
VALUATION METHODS
q Full Preliminary Term Reserve
• Modified Net Premium = aF, bF.
• aF = v.qx = Cx /Dx

• bF is determined by treating it as the premium for a unit insurance for a life

which is one year older. If the issue age of the contract is x, then bF is the
premium for a unit insurance for a life aged x+1.
• Whole Life : bF ä x+1 = Ax+1
• → bF = P x+1
• Endowment: bF ä x+1:n-1 = A x+1:n-1
• → bF = P x+1:n-1
VALUATION METHODS
q Zillmerised Reserve
• Let I = initial excess expense in the first year.
• I depends on the Sum Assured. Thus, 3% Zillmer means:
• If S = 1, I = 0.03,
• If S = 1000, I = 30,
• If S = 100,000, I = 3,000
VALUATION METHODS
q Zillmerised Reserve
• Amortize I over the premium paying period = term of policy under
Malaysian Insurance Act.
• Let Y = amount amortized each year.
• Whole Life : Y . äx = I
• → Y = I/ äx
• Endowment: Y . äx:n = I
• → Y = I/ äx:n

• We can now determine bz :

• bz = Net Premium + Amount of excess expense amortized each year
• For Whole Life : bz = Px + I/ äx
• For Endowment : bz = Px:n + I/äx:n