Question: Why might additional reserves be required towards the end of the contract? Answer: Higher reserves towards the end of the contract By the time the contract comes to the renewal date, the company must have sufficient reserves available to pay for the additional cost of the higher future mortality experience of those policyholders who exercise the renewal option. The company should be able to pay for these reserves from the premium loadings that have been received in the premiums of the original policy. Can you please explain to me how the reserving will work on the original policy and after renewal? Will reserves be held from the start and build up to the high reserve towards the end of the policy or does the company hold additional reserves towards the end of the policy using past premiums? I'm not sure I understand how the premium loadings and reserving would work
Hi Y Chen This question is in chapter 2. Further details of how prices are calculated for mortality options are given in chapter 23. The way reserves build up is the same for all contracts. At the start of the contract the insurer needs to set up reserves according to the rules. It may need to inject capital to do this if the reserving requirements plus initial expenses exceed the initial premium. Then, if experience follows the reserving basis, the reserves will grow every time a premium is paid and reserves are released to pay expenses and claims. In this particular contract (a term assurance with renewal option), the policyholder will have been paying a high premium (to cover the cost of the guarantee as described in chapter 23) and so the reserve will grow over time until it reaches the renewal date. After renewal the reserves will be gradually released to cover the extra cost of the guarantee. Best wishes Mark
