Some Experiments With Net Premium Valuations

Synopsis

The paper deals with the valuation of whole life and endowment assurance business in offices whose solvency is not in question and which are writing an expanding business.

A survey is made of the valuation methods and bases of major British life offices. A large majority of these offices use the net premium method for their published valuations and make these valuations on mortality and interest bases similar to those used in their current premium scales. A model office is used to study the provision for expenses made by net premium valuations. It is shown that the renewal expenses may often be less than the annual provision for expenses in the valuation, with the result that the valuation makes some provision for the initial expenses of new business.

Examples are given showing the rate at which surplus is released by net premium valuations in an expanding business and the rates of reversionary bonus provided are compared with the uniform rates supported by the premiums.

Further examples are given showing the rates of reversionary bonus provided by net premium valuations after changes in the experienced rates of interest, mortality and expense, and these reversionary bonuses are compared with the uniform reversionary bonuses supported by the reserves and the premiums under the new conditions.