Determining the Proper Interest Rate for Loss Reserve Discounting

Abstract

Property-liability loss reserves have been historically maintained at full undiscounted value, while life insurance reserves are discounted. Proponents of the undiscounted value argue that, unlike P/L loss reserves, life insurance benefits are relatively certain and thus more amenable to discounting, since the liability is quite likely to be realized. Others argue that the time value of money cannot be ignored, and all future liabilities should be discounted to properly reflect economic worth. As will be demonstrated in this paper, the views of both sides have merit and are incorporated into the proper result.