It is generally equal to the actuarial present value of the future cash flows of a contingent event.
Regulated insurers are required to keep offsetting assets to pay off this future liability.
The loss random variable is the starting point in the determination of any type of actuarial reserve calculation.
The net level premium reserve is found by taking the expected value of the loss random variable defined above.
The amount of prospective reserves at a point in time is derived by subtracting the actuarial present value of future valuation premiums from the actuarial present value of the future insurance benefits.
The two methods yield identical results (assuming bases are the same for both prospective and retrospective calculations).
Hence Then, taking expected values we have: Setting the reserve equal to zero and solving for P yields: For a whole life policy as defined above the premium is denoted as
[2] The calculation process often involves a number of assumptions, particularly in relation to future claims experience, and investment earnings potential.
Generally, the computation involves calculating the expected claims for each future time period.
In the above example, if there were no expected future claims after year 3, our computation would give Actuarial Reserves of $568,320.38.