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What exactly is a death strain?

Danny

Active Member
I just want to clarify, in plain English, exactly what the death strain is. That said, if you have a numerical example this would be really helpful!
 
Hi Danny,

A death strain is the strain (ie cost) to an insurance company of a death occurring. It is the amount of money (on top of the reserve that the company is holding) that the company will need to find on the death of a policy holder in order to pay their death benefits.

For any group of policies, we expect some deaths each year, and hence will expect some death strain. So we are normally interested in how much death strain we experience on top of what we expected (so the difference between expected death strain and actual death strain).

It’s also worth pointing out that death strain can be positive or negative:
  • For policies paying a benefit on death, death strain is positive and represents the extra amount of money we need to fund the death benefit.
  • For policies not paying a death benefit, eg an annuity, death strain is negative: this is because we do not need extra money to pay a death benefit when no death benefit is paid, but instead, we actually release the reserve that we were holding to fund future survival benefits when the policy holder dies. In other words, we receive money (from the release of reserve) on death, rather than needing to find extra money, and so the ‘cost’ or ‘strain’ is negative.

I hope this helps,
Richie
 
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