Hi, I have read the chapters for supervisory reserves. When we value the reserve for with profit product, under addition to benefits method, how prudent the reserving assumptions should be? (1) when we use net premium valuation method, should we use a reserving basis which is more prudent then the pricing basis? (2) when we use gross premium valuation method, should we use a reserving basis which is as prudent as the pricing basis? thanks
Reserving for Additions to Benefits WP business Hi uktous, We can't come up with definite comparisons like this. In any particular country, there might be regulations affecting how we price and reserve for such business, which might lead to the reserving basis being more or less prudent than the pricing basis. For example, consider the mortality and expense assumptions and let's suppose that there's a requirement for the reserving assumptions to be based on a prudent assessment of the expected likely future experience. The pricing assumptions might have been closer to best estimate at the time the business was priced, say. In this case, it's not possible to say for definite how the two bases compare, because we don't know how actual experience has changed since the business was priced, or even in what direction it has moved. Also, we don't know how much prudence there is in the reserving basis and whether this will offset or exaggerate the changes in experience. What we can say, though, is that the interest rate will be reduced to allow for future bonus to emerge under a net premium valuation and so, the interest rate used is likely to be lower than for an equivalent gross premium valuation.
