Reserves

Abstract

When an insurance company issues a policy, it determines the premium so that it can cover the expected benefit payments. As time passes by, the company receives premiums and pays out benefits. If we examine a policy some time after it is issued, we may find that the policy has already terminated because its term has expired or the insured has died. Therefore, it is of no interest to the company any more. On the other hand, if the policy is still in effect, we want to make sure all the future liabilities of the company can be met. If the future premiums will not suffice, a certain fund built up from the premiums already received has to be set aside, which makes up for the deficiency of future premiums. This amount is called the reserve of the policy. Having adequate reserves is essential for the solvency of any insurance company.