III IC-27 cheat sheet
III IC-27 · Keep the key ideas within reach.
Life Insurance Finance
Reserve = PV(future benefits) − PV(future net premiums); valuation uses prescribed mortality, interest, and lapse assumptions rather than pricing assumptions.
Net premium reserve uses the net premium (benefits only) while gross premium reserve also deducts expense loads and margins, so gross premium reserves are typically lower when expenses are front-loaded.
Terminal reserve at the end of the coverage period equals zero for term insurance; for whole life the terminal reserve equals the face amount at the limiting age when mortality reaches 100%.
Prospective reserve looks forward from the valuation date; retrospective reserve looks back at accumulated premiums minus accumulated cost of insurance. They are equal only if actual experience equals valuation assumptions.
Modified reserve methods (full preliminary term, CRVM, commissioners reserve valuation method) reduce first-year reserves by deferring acquisition costs, keeping reserves within statutory minimums.
Reserve increase between durations equals net premium minus cost of insurance plus interest on the prior reserve: (V + P)(1+i) − q(F − V) = next reserve.
Deferred acquisition cost (DAC) is an asset amortized against future gross profits; under statutory accounting acquisition costs are expensed immediately, creating a surplus strain.
Cash value is not equal to reserve; it is the reserve less surrender charges and may include a nonforfeiture minimum set by statute (e.g., 3% minimum interest, CSO mortality).