General expense reserve (France, PGG)

A life insurance contract costs money to administer throughout its life: account keeping, annual statements, processing surrenders and switches, IT, compliance. The insurer funds these costs through loadings, charged on premiums or on the fund. When those future loadings are insufficient to cover future costs, for example because an old contract was sold with very low charges or because IT and regulatory costs have risen, the French Insurance Code requires the general expense reserve to be set up. It equals the present value of the gap between future administration costs and future loadings, calculated contract by contract or by homogeneous group. It is a prudential reserve, which forces the insurer to recognize immediately a loss that would otherwise materialize over the years. It is sensitive to two assumptions: rates, since it is discounted, and contract duration, since costs run as long as the contract exists. Under Solvency II, future expenses are built directly into the best estimate of liabilities, with their own inflation, which makes the reserve redundant in the economic balance sheet but leaves it in the statutory accounts.