Increasing risk reserve (France, PRC)
A reserve set up by the insurer when a contract's premium stays level while the risk rises with the insured's age, in long-term care, health or lifetime individual protection.
In some health, long-term care or individual protection contracts, the premium is set to remain level, or change little, throughout the cover, while the risk rises with age. The insured therefore pays more than the risk in the early years and less in the later ones. The early-year surplus is not profit: it funds the years when the premium will no longer be enough. The increasing risk reserve recognizes this commitment. It equals the difference between the present value of the insurer's future liabilities and that of future premiums, and it grows while the insured is young before declining. The French Insurance Code requires it for sickness and disability insurance when the risk is increasing and the premium level. Its calculation depends heavily on mortality, morbidity, lapse and interest rate assumptions: lower lapses than expected, for example because older insureds can no longer change insurer, make it insufficient. It lies at the heart of the difficulty of long-term care insurance, where the risk is concentrated decades after underwriting, and of the debate on in-year termination in health insurance, which threatens premium leveling.
Textbook case: an insurer sells long-term care at a level 40 euros a month to 55-year-old buyers, whose annual risk is worth only 10 euros a month at that age. Each year, the surplus, accumulated with interest, feeds the increasing risk reserve, which will fund benefits when these insureds are 85.
PRC, increasing risk reserve, active life reserve
Follow the research
One letter a week. First, the week's underwriting note, when one is published: a dated, argued decision, signed by Paul Bernardski. Then what the observatory published on cyber risk, political risk and insurance. No account, no tracking.
No spam, one-click unsubscribe, no data ever sold.