PREMIUMS

5.1 Principles of premium calculations

Premiums calculated without an allowance for expenses are called net premiums, whilst premiums
which are actually charged are called office or gross premiums. Office premiums are usually cal
culated with an explicit allowance for expenses, and in some cases for a profit to the office. A life
assurance policy may be issued with;

(a) A single premium payable at the date of issue, or

(b) Regular premiums payable in advance and usually (but not always) of level amount.

The frequency of regular payments may be, for example, yearly or monthly, and the maximum
number of premiums payable may be limited to (for example) 20. Premiums should, of course, cease
on the death of the assured life, when the policy matures, or when there is no longer any possibility of
future benefits: for example, on the expiry of the term of a temporary (term) assurance policy.

Premiums are usually calculated by the equivalence principle, which may be stated as follows:
E (Z) = 0 (5.1.1)
Where;
Z = present value of profit to the life office on the contract
In some cases an explicit loading for profit is included in the calculation; that is, we replace equation
(5.1.1) by
E (Z) = B (5.1.2)
Where;
B = M.P.V. of profit on the contract.
In the absence of information to the contrary, however, we shall assume that the equivalence
principle (5.1.1) is to be used, although in some cases the use of “conservative” assumptions
regarding mortality, interest and expenses means that the office has an implicit margin of expected
profit. The rate of interest is usually taken to be fixed (not random).

5.2 Notation for premiums

The International Actuarial Notation (see Formulae and Tables for Actuarial Examinations) should
be used, at least for straightforward policies. If the policy is complicated it is best to just use the
symbol P (or P l , P ll) for the premium (single or regular). The general symbols P, P l , P ll may
be used for any sum assured, but the standard symbols Px, P¯ ( A¯ x ) , etc. , refer to a sum
assured of
£1.

Some of the more important rules of the International Notation are the following:
1. The symbols P ( ), or P¯( ), or P (m)( ) indicate the level net annual premium for the benefit
indicated in the brackets. Premiums are assumed to continue for as long as the contract
can provide benefits, i.e. n years for a n-year contract, provided of course that the life
assured is still alive. P, P¯, P (m) indicate that payments are made annually in advance,
continuously and mthly in advance respectively.
2. If premiums are limited to, at most t years’ payments (where t < the term of contract, i.e.
the term of the benefits), we write tP ( ), tP¯( ), tP (m)( ).
e.g.

10P (Ax:20 ) = net annual premium for 20-year EA with S.A. =1

(payable at end of year of death or on survival
for 20 years.), limited to at most 10 payments (i.e.
 2

payments cease on death or after 10 payments are

made, whichever occurs first)
A
= a¨ x:20
x:10

3. When benefits are payable at end of year of death we may (optionally) shorten the notation
as follows:
(e.g.) P (Ax) = Px
5.3. THE VARIANCE OF THE PRESENT VALUE OF THE PROFIT ON A POLICY.

Table 5.2.1 relates to a mortality table with select period 2 years, for example A1967-70, and refers
to policies in which premiums are payable annually in advance.

5.3 The variance of the present value of the profit on a policy.

Consider again the policy of Example 5.1.1. We have

g (T ) = p.v. of profit to office on contract

= P a¯ − vT
T
(We need not assume the equivalence principle holds: if it does, E[g(T )] = 0.) Note that
1 − vT
g(T ) = P −
T

( δ
v)
P P+δ
= − vT
δ δ
(
P+δ
∴ Var[g(T )] = Var(vT )
)2

δ
( )2
P+δ [
= ¯ − Ax¯ (5.3.1)
δ "-A
∗ x
2]

at ra
..
2i + i2
te
Note the idea of “collecting” all the terms involving vT before taking the variance: a similar technique
may be used for endowment assurance policies (but not generally).

5.4 Premiums allowing for expenses

Most expenses may be classified as either:
(a) initial (incurred at the outset only) , or
(b) renewal (incurred on the payment of later premiums).
There may also be expenses of payment of benefits (especially for pensions and annuities) and the
expenses of maintaining records of policies with continuing benefits after premiums have ceased.
Expenses may also be divided into:
(i) commission payments, and
(ii) other costs.
Some offices employ a policy fee system, whereby a fixed addition of (say) £15 is added to the
annual premium; for example the office annual premium for a policy with a sum assured for £20,000
may be quoted as “£10 per £1,000 plus a policy fee of £15”, giving £20× 10 + £15 = £215. This
system reflects the fact that certain administrative costs do not depend on the size of the benefit.

Example 5.4.1. Consider n-year endowment assurance without profits with sum assured £1 issued
to a select life aged x. Expenses are e per premium payment (including the first) plus I at issue
date (so the total initial expense is I + e ). Find formulae for the level office annual premium, P ll.
CHAPTER 5. PREMIUMS

Net Annual Premium Net Annual Premium

payable throughout duration of contract Limited to t payments
Type of
Assurance
In terms of In terms of commutation In terms of In terms of commutation
Symbol Functions (n ≥ 2) Symbol Functions (n ≥ 2 and t ≥ 2)
A and a¨ A and a¨

A[1]:n M[x] − Mx+n A[1]:n M[x] − Mx+n

Temporary P [1]:n x
1
tP [ ]:n x
x
a¨ [x]:n N[x] − Nx+n x
a¨ [x]:t N[x] − Nx+t
1 1
1 m|A[ ]:n Mx+m − Mx+m+n 1 m|A[ ]:n Mx+m − Mx+m+n
Deferred P m |A[ ]:n x tP m|A[ ]:n x
Temporary x
a¨ [x]:m+n N[x] − Nx+m+n x
a¨ [x]:t N[x] − Nx+t

A[x] M[x] A[x] M[x]

Whole-life P[x] tP[x]
a¨ [ x ] N[x] a¨ [x]:t N[x] − Nx+t

Deferred m|A[x] Mx+m m|A[x] Mx+m

P (m|A[x]) tP (m|A[x])
Whole-life a¨ [ x ] N[x] a¨ [x]:t N[x] − Nx+t

A[x]:n M[x] − Mx+n + A[x]:n M[x] − Mx+n + Dx+n

Endowment P[x]:n tP[x]:n
Assurance a¨ [x]:n Dx+n a¨ [x]:t N[x] − Nx+t
N[x] − Nx+n

Table 5.2.1: Expressions for Annual Premiums. Select Mortality Table (select period 2 years)
Note. When n < 2 or t < 2, these formulae should be suitably modified.
84
5.5. P R E M I U M S FOR WITH PROFITS POLICIES

Solution. The equation of value is

P ll a¨ [x]:n = A[x]:n + ea¨ [x]:n + I (5.4.1)

where P ll = level annual premium. Suppose further that e = kP ll (i.e. renewal expenses are a
proportion k of the office premium): we have
ll
(1 − k)P a¨ [x]:n = A[x]:n + I
A[x]:n + I
∴ P ll =(1 − k)a¨ [x]:n l
1 I
1 + (5.4.2)
= P
[x]:
(1 − k) n a¨ [x]:n

Sometimes I is a proportion of the first premium, cP ll, say. This leads to

ll ll
(1 − k)P a¨ [x]:n = A[x]:n + cP
∴ P ll = A[x]:n
(1 − k)a¨ [x]:n − c
(For example, k = 2 1 % and c = 471 % if expenses are 50% of the first premium and 2 1 % of all
2 2 2
subsequent premiums .)

5.5 Premiums for with profits policies

In early days of life assurance, premiums for policies with the right to participate in the profits of the
life office were calculated on conservative assumptions but without an explicit allowance for bonus
declarations. In modern conditions there is often an explicit allowance for possible future bonus
rates for with profits (or “participating”) policies, as illustrated in the next example.

5.6 Return of premium problems

Consider, as an example, a policy issued to (x) with level annual premiums, P , providing:
(i) £1, 000 on survival for n years, and
(ii) a return of all premiums paid, at the end of the year of death, if (x) dies within n years.
Assume firstly that the premiums are returned without interest (sometimes described as “Return
No Interest”, abbreviated to R.N.I.). If there are no expenses, the equation of value for P is:
P a¨ Dx+n
= 1000 x:
x: + P (5.6.1)
n Dx (IA)1 n
"- "-

sur v ival retu r n

.. ..
benefit premiums
ofon death
This may be solved for P .
Note. If the premiums are returned immediately on death, replace (IA)1 x: by (I A¯x):1 .
n
n
Now suppose that the premiums are returned with compound interest at rate j p.a. In practice,
such policies are often described as “ Return With Interest” (R.W.I.). If the death benefit is paid
at the end of the year of death, the term P (IA)1x: in equation (5.6.1) must be replaced by
n
n−1
L n o
k+1
k=0 v k |qx P s¨k+1 j

"- ..
death benefit
in year k + 1
n L −1 1
(1 + j)k+1
=
P dl vk+1k|qx
− 1j
 P
k=0
= . {A∗1 − A1 } (5.6.2)
[j/(1 + j)] x: x:n
n
i−j
where ∗ indicates the rate of interest
1+
Notes. 1. If the death benefit
1
ispayable
j1 immediately on death, formula (5.6.2) should be multi-
∗ 1
plied by (1 + i) 2 /(1 + j) 2 = (1 + i ) 2 .
2. If i (the rate of interest used to discount premiums and benefits in the equation of
value) equals j, some of these problems may be simplified: if there are no expenses,
mortality (within n years) may be ignored giving the compound interest equation
P a¨ n = 1000vn

5.7. ANNUITIES WITH GUARANTEES 87

This result may best be proved by reference to reserves, which we shall discuss later.

5.7 Annuities with guarantees

Annuities are sometimes sold with the provision that payments will certainly continue until their
total equals the purchase price, B say (or possibly some proportion of this purchase price.)

Let us consider an annuity of £1 p.a., payable continuously with this guarantee to a life aged x
at the issue date. Ignoring expenses, the equation of value for B is
B = a¯ B + B | a¯ x (5.7.1)

Theorem 5.7.1. Equation (5.7.1) has a unique solution

Proof. Let

f (B) = a¯ B + B | a¯ x − B (B ≥ 0)
- B - ∞
= + vttpxdt − B
B
t
v dt
Hence 0

fl(B) = vB − vBtpx − 1
= vBBqx − 1
<0 for all B > 0

Now f (0) = a¯ x > 0 and, as B → ∞, f (B) → −∞ a¯ x →δ and B | a¯ x → 0). It follows that

(as 1

f (B) = 0 has a unique solution

88

Note. The purchase price of an annuity with this guarantee may be considerably larger than for
an ordinary annuity.

If the annuity instalments are paid annually in arrear we must solve the equation
B = an + n|ax (5.7.2)
subject to the condition n −1 < B n. (Here n is the guarantee period, which must be an integer.)
This is solved by trial and error.

Another type of guaranteed annuity is that in which the balance (if any) of the purchase price
(or a proportion of it) over the total annuity payments received is paid immediately on the death
of the annuitant. For example, if the guarantee consists of a payment of the balance of 85% of the
purchase price over the total annuity instalments received, equation (5.7.1) would be replaced by
- n
B = a¯ B + [0. 85B − t vttpxµx+tdt (5.7.3)
]
0

where n = 0.85B payments equal

(the time when 85% of the
the annuity purchase price).

5.8 Family income benefits

A family income benefit of term n years is a series of instalments payable from the date of death of
the assured life, if he dies within n years, for the balance of the term. It may be considered as a
decreasing term assurance in which the benefit on death is an annuity-certain for the balance of the
term.

Case 1.The benefits are payable continuously

Suppose that F.I.B. payments are at rate £B per annum, and the life assured is aged x at the issue
date. The present value of the benefits is
B (a¯ n − a¯ T ) if T <
n (5.8.1)
0 if T ≥ n
The P.V. of the benefits may thus be written in the form

B a¯ n − a¯ min{T ,n} (5.8.2)

and hence their M.P.V. is
B (a¯ n − a¯ x : n ) (5.8.3)
Case 2.The benefits made m thly
in arrear, beginning at the end of the 1/m year of death (mea-
sured from the issue date.)
Consider the combination of a F.I.B. and an mthly temporary annuity of term n years, payable in
arrear. It is clear that their total present value is Ba(m)
n no matter when (x) dies. Hence the M.P.V.
of the family income benefit is
(5.8.4)
B a(m) −
a(m)
n x:
Case 3. As in case 2, but with payments beginningn immediately on death.
As payments are received on average2m1 year earlier than in case 2, the M.P.V. is approximately
B(1 + i) 2m
1
a(m) − (5.8.5)
a(m)
n x :n

Premiums. These are found by an equation of value in the usual way. There is, however, a
danger that, if premiums are payable for the full n-year term, the policy may have a negative reserve
at the later durations (see later discussion of reserves.) This means that the policyholder may be
able to lapse the contract leaving the office with a loss, and possibly obtain the same benefits more
cheaply by effecting a new policy. In practice, the effect of expenses and other factors may make this
possibility hardly profitable, especially if the F.I.B. is part of a more general assurance contract, as
in Example 5.8.1 below. The possibility of lapse option may be avoided by making the premium -
paying term shorter than the benefit term.

Mortgage protection policies are similar to those for family income benefits, although the
death benefits are payable in one sum rather than in instalments over balance of the term. The
similarity arises from the fact that the loan outstanding after the tth payment has been made is
equal to the value of the future loan instalments (see McCutcheon and Scott, “An Introduction to
the Mathematics of Finance”, Table 3.8.1).
.
90 CHAPTER 5. PREMIUMS

RESERVES

6.1 What are reserves?

Reserves, or policy values, are sums of money held by financial institutions such as life offices
and pension funds to cover the difference between the present value of future liabilities (including
expenses) and the present value of future premiums or contributions. Alternatively, the reserve of
a contract may be considered as an accumulation of past premiums less expenses and the cost of
death claims (and other benefits). Reserves are required for various purposes, e.g.
(1) to pay surrender values (or transfer values in a pension fund);
(2) to work out the revised premium or sum assured if a policy is altered or converted to another
type;
(3) for inclusion in statutory returns to the Department of Trade and Industry (or other supervisory
bodies) for the purpose of demonstrating the office’s solvency;
(4) for internal office calculations to decide the bonus rates of with-profits policies, the distribution
of profits to shareholders, etc.

The bases used to calculate “reserves” for each of these purposes may be different, and some
practical considerations are beyond our present scope.

6.2 Prospective reserves

Consider a life assurance policy issued t years ago to a life then aged x. Define the NET LIABILITY
or PROSPECTIVE LOSS of the office in respect of this policy to be the random variable

L = present value of future benefits

+ present value of future expenses
− present value of future premiums (6.2.1)

The reserve or policy value of the contract (calculated prospectively, i.e. by reference to future
cashflows) is defined as

V = E(L)
t (6.2.2)
= M.P.V. of future benefits and expenses
− M.P.V. of future premiums (6.2.3)

95
96 CHAPTER 6.
RESERVES
If expenses may be ignored, we have

tV = M.P.V of future benefits

− M.P.V of future premiums (6.2.4)

The mortality, interest and expense assumptions used to evaluate tV are known as the reserving
basis. This may or may not agree with the premium basis. If these bases agree (or are assumed
to agree) and there are no expenses, we obtain net premium reserves, which we shall consider
in the next section. By convention, the reserve tV is calculated just before receipt of any premium
then due: the reserve just after payment of this premium is

V + P ll − e
t (6.2.5)

where P ll is the premium paid at duration t years and e is the expense then incurred.

Are negative reserves allowable?

Certain formulae may give negative values of tV, at least for some policies and at early durations t.
A negative reserve should not normally be held because the life office is thereby treating the contract
as an asset: if the policy is discontinued there is no way in which the policyholder can be made to
pay money to the office! Similarly, the reserves stated in Statutory Returns should not be negative,
although negative reserves may be permissible in certain internal office calculations.
The general rule is therefore that, if a formula gives a negative value of tV, this should be replaced by
zero. Policies should in general be designed so that negative reserves do not arise (cf. the discussion
of family income benefit policies in Section 5.8).

6.3 Net premium reserves

These are reserves calculated without allowance for expenses, and on the assumption that the pre-
mium and the reserve bases agree. (In some cases, the actual premium basis is different, and the
premiums valued are calculated on the reserve basis). A net premium reserve basis is
unambiguously specified by
(i) a mortality table, and

(ii) a rate of interest.

By formula (6.2.4),
t V = net premium reserve

= M.P.V. of future benefits - M.P.V. of future premiums

(6.3.1)
where the valuation assurance and annuity factors are calculated on the specified mortality and
interest basis. The premiums valued are also calculated on this basis.

Example 6.3.1. Consider a whole life policy with sum assured £1 without profits, payable imme-
diately on the death of (x). The policy was issued t years ago by level annual premiums payable
continuously throughout life. Find a formula for the net premium reserve tV (on a given mortality
and interest basis).
6.3. NET PREMIUM RESERVES 97

Solution. Let L be the net liability (a random variable). We have

L = vU − P a¯
U
where U = future lifetime of (x + t), and P = P¯ (A¯ x ).
∴ tV = E(L) = A¯x+t − P¯ (A¯ x )a¯ x + t .

Notation. The International Notation for net premium reserves is similar to that for premiums,
with the addition of “t” to indicate the duration. If premiums are limited to (say) h years of payment,
the symbol h is placed above the duration t, as shown in Table 6.3.1. The general symbol tV may
be used for any sum assured and any reserve, whether net premium or not, but tVx, tV¯ (A¯ x ), etc.,
refer to net premium reserves for a policy with a sum assured of £1. If select mortality tables are
used, we write tV[x], etc.
CONVENTIONS

(1) The symbols tVx, etc., refer to the reserves just before payment of the premium due at time
t (if a premium is then payable.) The net premium reserve just after receipt of this
premium is of course tVx + Px, etc. Similar considerations apply if premiums are payable
half-yearly, monthly, etc.
(2) By formula (6.3.1) with t = 0, we have 0V = 0 for all net premium reserves. In the case of
n-year endowment assurances or pure endowments, it is not always clear whether to take nV
as zero or the sum assured (S, say), i.e. whether to assume that the sum assured has or has
not already been paid. It appears that the convention nV = 0 is used in profit testing but not
elsewhere.

Type of
Notation Prospective Formula for Reserve
Policy
Whole Life A¯x+t − P¯ (A¯x )a¯ x+t
t V¯ (A¯ x )
Assurance
n-year Term t V¯ ( A ¯ 1 ) A¯ 1
− P¯ ( A¯ 1 ) a¯
x:n x+t:n−t x:n
Assurance x+t:n−t

n-year Endowment A¯x+t:n−t − P¯ (A¯ x : n

t V¯(A¯x : n
Assurance
) )a¯x+t:n−t
h-Payment Years A¯x+t − h P¯ (A¯ x )a¯ x + t : h − t
Whole Life
h
V¯ t<
(A¯x) t
Assurance h A¯x+t t≥
h
h-Payment Years ¯
h ¯ Ax+t:n−t − h P¯(A¯x:n )a¯ t<h
n-year V (A¯x:n ) ¯ x+t:h−t
Endowment t A t≥ h
x+t:n−t
Assurance
n-year Pure tV¯(Ax: 1 ) Ax+t:n 1t − P¯(Ax: 1 )a¯ x+t:n−t
n
Endowment − n

Table 6.3.1: Net Premium Reserves (premiums payable continuously)

98 CHAPTER 6.
RESERVES
Type of
Symbol Prospective Policy Value Retrospective Policy Value
Policy
Dx [ ]
Whole Life Ax+t − P x a¨ x+t P x a¨ x:t − xA1:t
tVx
Assurance Dx+t
Dx [ ]
Endowment Ax+t:n−t − Px:n Px:n a¨ x : t − xA1:t
tVx:n
Assurance Dx+t
a¨ x+t:n−t
Dx [ 1 ]
Temporary 1 Ax1 t:n−t − P 1:n a¨ x+t:n−t P a¨ − A1
tVx:n x:n
Assurance + x x:t x:t
Dx+t
Dx
Pure tVx: 1 Ax+t:n 1t − Px: 1 a¨ x+t:n−t [P 1 a¨ ]
Endowment n − n x:n x:t
Dx+t

Table 6.3.2: Net Premium Reserves (premiums payable annually)

Example 6.3.2.

(i) What is the International Notation for the reserve of Example 6.3.1 ?

(ii) Express this reserve in terms of annuity functions.

Solution.

(i) V
t

¯ (A¯x )

(ii) tV¯ (A¯x ) = A¯x+t − P¯ (A¯x )a¯ x+t

= 1 − δ a¯ 1
x+ − ( − x+ using conversion relationships
t δ)a¯ a¯
x t

= 1− (6.3.2)
a¯
x+ t
a¯
x

Reserves at non-integer durations

Let us consider (for example) a whole life non-profit policy with sum assured £1 payable at the end
of the year of death, effected by (x) by level annual premiums, Px. The net premium reserve at
integer duration t is
tVx just before premium is paid
tVx + Px just after premium is paid
Now consider duration r + k, integer r, 0 < k < 1. The reserve r+k Vx is estimated by linear
interpolation between rVx + Px and r+1Vx, i.e.

r+k Vx � (1 − k)(rVx + Px) + kr+1Vx (0 < k < 1) (6.3.3)

[The actual value is

−k −k
v1 [1−kqx+r+k + (1 − 1−kqx+r+k)Ax+r+1] − Pxv1 (1 − 1−k qx+r+k )a¨x+r+1
6.4. RETROSPECTIVE RESERVES 99

which is complicated to evaluate.] Similar formulae apply for other classes of business with premi-
ums payable annually in advance.

Reserves when premiums are payable mthly

Suppose that premiums are payable mthly in advance (e.g. m=12, which corresponds to monthly
premiums, which are very common in practice.) To simplify matters let us suppose that the sum
assured is payable immediately on death: this avoids the calculation of awkward assurance factors
at non-integer ages. Consider a policy providing £1,000 immediately on the death of (x), effected
by mthly premiums during the lifetime of (x). The annual premium, payable mthly in advance, is
P (m) (A¯x ) = P , say, and the reserve at duration t (where t is an integer multiple of
m ) is
1

tV = 1, 000A¯x+t − P just before payment of the premium then due,

x+
a¨ ( m ) t

or

t V+ P
m just after payment of this premium.

The reserve at duration t = r +

k
m
(where r is an integer multiple of 1
and 0 < k < 1) is usually
m
estimated by linear interpolation between rV + P
and r+ 1 V.
m m
NOTE One may use standard symbols, e.g.

(A¯x ) = A¯x+t − P (12) (A¯x )a¨

(12) (12)
tV x+
t
tV
(4)
(Ax:¯101 ) = A ¯ 1
x+t:10−t − P
(4)
(A ¯1
x:10 )x+t (4)
a¨:10−t

if t is an integer multiple of 1
and 1 respectively, but these are seldom employed.
12 4

6.4 Retrospective reserves

So far we have calculated the reserve of a policy by referring to future cashflows, assuming that
the contract will not be surrendered. In practice, the policyholder may wish to surrender the
contract, and in that event will, at least in the early years of the policy, probably expect a surrender
value related to the accumulation of his premiums less expenses and the cost of life assurance
cover. Such a surrender value is related to the retrospective reserve of the contract, which is
obtained by accumulating the premiums less expenses and the cost of benefits, of a hypothetical large
group of identical policies whose mortality follows the office’s tables exactly (i.e. without random
fluctuations), and then dividing the hypothetical funds among the survivors.
Let us again assume that there are no expenses and that the premium and reserve bases agree.
Consider, for example, a whole-life policy, with sum assured £1 payable at the end of the year
of death, issued t years ago by level annual premiums to a life then aged x. The (prospective)
net premium reserve (on a specified mortality and interest basis, e.g. A1967-70 ultimate, 6% p.a.
interest) just before payment of the premium now due is

tVx = Ax+t − P x a¨ x+t

The corresponding retrospective reserve is found by accumulating the funds of (say) lx identical
policies until time t, and sharing the money out among the survivors. Since mortality is assumed to
follow the table exactly, there are dx deaths in the first policy year, dx+1 in the second policy year,
and so on, with lx+t survivors at time t. Interest is assumed to be earned at the rate i p.a. used in
10 CHAPTER 6.
0 RESERVES
the premium and the reserving bases, so the accumulated funds at time t are

[lxPx(1 + i)t + lx+1Px(1 + i)t−1 + · · · + lx+t−1Px(1 + i)]

− [dx(1 + i)t−1 + dx+1(1 + i)t−2 + · · · + dx+t−1]
=lx(1 + i) t [P x a¨ x:t − Ax1:t ]
On division by lx+t (the assumed number of survivors at policy duration t), we find that
retrospective
reserve at Dx [P a¨ −A 1
]
= Dx+ x x:t x :t
duration t years
t
More generally, we have

retrospective  
M.P.V. (at issue date) of
reserve at premiums, minus M.P.V.
Dx of benefits and expenses, in
duration t years = D (6.4.1)
x+
t the first t years
If there are no expenses, we have
retrospective
M.P.V. (at issue date) of
reserve at = premiums, less benefits in 
duration t years DD
x
x+t (6.4.2)
first t years
Some examples of formulae for retrospective reserves are given in Table 6.3.2 above.

Theorem 6.4.1. If the premium and the reserving bases agree, the prospective and the retrospective
reserves of a given policy are equal.
Proof. We illustrate the argument by means of the whole life policy discussed earlier in this section.
The retrospective and prospective reserves at policy duration t are
Dx
V = [P a¨ − A1 ]
R x x:t
x:t

and Dx+t

VP = Ax+t − P x a¨ x+t

respectively. Hence

Dx+t
Dx (V − )= a¨ − Ax:t
1
R VP Px x:t
Dx+t
Dx+
− Ax+t + t
P x a¨ x+t
Dx
Dx
= P x a¨ x − Ax

(using the facts that a¨ x = a¨ x : t + t | a¨ x and Ax = A1:t + t|Ax.)

x

But P x a¨ x Ax = 0, by the equation of value for the level annual premium, so we have proved the
−
desired result.
This argument may easily be extended to cover other policies, including situations in which there
are expenses.
6.4. RETROSPECTIVE RESERVES 101

It follows that, if the premium and reserving bases agree (or are assumed to agree in reserve calcu-
lations), one need not specify whether a prospective or retrospective reserve is required. In practice,
however, the prospective method is more often used.

Example 6.4.1. Give formulae for the following net premium reserves in terms of other monetary
functions:

(i) Vx:n ,
t

(ii) t V¯ (A¯x:n ),

by (a) the prospective method, and

(b) the retrospective method.

Solution.

(i) (a) Ax+t:n−t − Px:n a¨ x+t:n−t

Dx
(b) {P a¨ − A1 }
Dx+t x: x: x:t
n t

(ii)
(a) A¯ − P¯ (A¯x:n
x+t:n− x+t:n−t
)a¯ Dt x
(b) ) − A¯1 }
{P¯ (A¯ ā
Dx+t x:n x: x:t
t

Example 6.4.2. Show that

(i) tVx:n =1
(6.4.3)
a¨x+t:
− n−t
a¨ x : n

(ii) tV
¯ )=1
(6.4.4)
a¯ x+t:n−t
(A¯x:n − a¯
x:n

Solution.

(i)

tVx:n = Ax+t:n−t − Px:n a¨ x+t:n−t

= 1 − d a¨ 1
x+t:n− −( − x+t:n−t
t d)a¨a¨x:
n
=1
−
a¨x+t:
n−t
a¨ x : n
10 CHAPTER 6.
2 RESERVES
(ii)

tV¯ (A¯x:n ) = x+t:n−

A¯ − P¯ (A¯x:n x+t:n−t
)a¯ t

= 1 − δ a¯ 1
x+t:n− − ( − x+t:n−t
t δ)a¯a¯x:
n
= 1−
a¯x+t:
n−t
a¯ x : n

6.5 Gross premium valuations and asset shares.

We now allow for the possibility of expenses in the premium and reserving bases, which are no
longer assumed to be the same. The reserves obtained by the formula (6.2.3) are called prospective
gross premium reserves, whereas those obtained by a retrospective accumulation of premiums less
expenses and the cost of life assurance benefits are called retrospective gross premium reserves. (In
practice, however, the phrase “gross premium reserve” usually refers to prospective reserves only.)
If the premium and reserve bases do not agree, the two methods will normally give different results.
An important feature of gross premium reserves are the facts that the prospective reserve at
inception is not normally equal to zero, and the retrospective gross premium reserve of an n-year
policy just after it matures is not generally equal to zero.

We begin by considering prospective gross premium reserves. The premium basis (or the premi-
ums themselves) must be specified, together with the reserving basis, which gives

(i) a mortality table,

(ii) an interest rate, and

(iii) the allowance for future expenses.

If the allowance for future expenses is a proportion k of future premiums (including any due
now), the formula for the prospective reserve is

V = M.P.V. of future benefits M.P.V. of future

t
− (6.5.1)
premiums
multiplied by the
factor (1 − k)

Example 6.5.1. Consider the whole life policy discussed in section 6.4 above, and suppose that

(i) the premium basis is A1967-70 ultimate, 6% p.a. interest, with no allowance for expenses; and

(ii) reserves are to be calculated prospectively by the gross premium method on the following
basis:

mortality: A1967-70 ultimate;

interest: 4% p.a.;
expenses: 5% of all future premiums.

Find a formula for the reserve at duration t years (just before receipt of the premium then due.)
6.5. GROSS PREMIUM VALUATIONS AND ASSET SHARES. 103

Solution
The annual premium is

P l = Px on A1967-70 ultimate, 6% p.a.

so the formula for the reserve is

V = Ax+t − 0.95P l a¨ x+t
t

where the factors Ax+t and a¨ x + t are on A1967-70 ultimate, 4% interest.

If a retrospective gross premium reserve is required, one must specify the allowance for past
expenses. If, in the policy of example 6.5.1, one allowed for expenses of 10% of all past premiums, the
formula for the retrospective gross premium reserve would be
Dx
V
t [ . Pl ]
a =
Dx+t 0 9 ¨ x: − A1x:t
t

where the annuity and assurance factors, and Dx/Dx+t, are on A1967-70 ultimate at 4% p.a. inter-
est (or whatever mortality and interest basis is to be used.)

Asset shares
The asset share of a life assurance policy is a retrospective gross premium reserve calculated on the
basis of the mortality, interest and expenses actually experienced by the office. In order to illustrate
the calculations, let us consider an n-year policy issued t years ago to (x), and define

St = sum assured in year t (payable at end of year of death);

Pt = premium payable at the start of policy year t;
et = actual expenses incurred at the start of policy year t;
it = rate of interest earned by the office in policy year t;
q[x]+t = observed mortality rate among lives aged x + t who
entered assurance at age x.

Let tV denote the asset share at duration t of the policy, before payment of the premium then due.
We clearly have 0V = 0, and the following relation holds:

t+1 V = (tV + Pt+1 − et+1)(1 + it+1) − death cost, Dt+1 0≤ t≤ n− 1 (6.5.2)

To calculate the “death cost”, we must consider the given policy’s share of the cost of making the
asset share (at the end of the policy year) up to the sum assured, St+1, for those policies
which became claims in the year. Since the proportion of policies in force at the start of the year
which became claims was q[x]+t, the death cost is

Dt+1 =q[x]+t(St+1 − t+1 V) (6.5.3)

(which is negative if St+1 < t+1V).

Notes

1. As will be stated in the next chapter, the quantity St+1 − t+1V is called the death strain at risk
of the policy in year t + 1.

2. By substituting formula (6.5.3) in formula (6.5.2), we may obtain an expression for t+1V in terms
of tV and other known quantities. In practice, however, one may perhaps replace Dt+1 by a
suitable approximate value and use formula (6.5.2) directly.
104 CHAPTER 6.
RESERVES
3. The asset share at policy duration n years may of course differ from the maturity value, leading
to a profit or loss to the office at that time.

4. In the unlikely event that mortality , interest and expenses follow a certain valuation basis
exactly, the asset share of a policy will equal the retrospective gross premium reserve on
that basis.

5. Asset shares are particularly important for with profit policies, as their surrender and maturity
values are not fixed in advance and the asset share gives one method of deciding “fair” surrender
and maturity values. A number of other considerations are, however, also involved, and we shall
not pursue the discussion of asset shares.

Net premium versus gross premium reserves

A full description of the advantages and disadvantages of the various approaches is outside the scope
of this course, but we make some remarks.
It would at first seem obvious that a prospective gross premium valuation should be used, as
this represents the mean of the present value of the net liability. But this assumes that the policy
will not be surrendered: the policyholder may do this at any time, and (at least in the early years
of the contract) will expect a surrender value related to the accumulation of his past premiums
less expenses, i.e. a retrospective gross premium reserve. This suggests that the office should hold
reserves equal to the greater of

(i) a prospective premium reserve, and

(ii) a retrospective gross premium reserve (or asset share),

the bases being perhaps different (reflecting expected future conditions and actual past conditions
respectively.) The position is further complicated by the possible existence of guaranteed surrender
values and the difficulty of estimating future conditions. In practice, a net premium valuation at
a low rate of interest may be used, either by choice or because this is required by the supervisory
authorities: such a basis (though apparently artificial, since the premium value is unrelated to
the actual premium being charged) may have the property that the corresponding reserves are
comparable with, or generally greater than, the more “scientific” reserves given above. Similar
arguments lead to the “net premium method” for with-profit policies (provided that terminal
bonuses are allowed for separately): cf. Section 6.9 below.
The reason for the use of a low rate of interest in net premium reserves is that, by Lidstone’s
theorem, net premium reserves normally increase as the rate of interest falls.
The supervisory authorities may be prepared to allow Zillmerisation (see Section 6.7 below) of
the reserves (subject to limits on I), but many offices prefer to publish unmodified net premium
reserves, in case Zillmerisation is seen as a sign of financial weakness.
The above discussion refers mainly to the calculation of reserves for solvency testing, but
reserves are also used for internal purposes: deciding upon bonus levels, alterations to policies, etc.
For these purposes the office may use other bases.
The office must also allow for random fluctuations from the mean numbers of deaths (especially
when there is a small number of policies with very large sums assured or death strains at risk) and
consider the exchange or reinsurance of large risks.

6.6 The variance of L

We return to the definition of the random variable L given by formula (6.2.1). Its mean is defined
as the reserve tV, but in certain problems we also require its variance, Var(L). How may this best
be calculated?
6.6. THE VARIANCE OF L 105

Let us consider a policy providing £S immediately on the death of a life aged x at issue, with
premiums of P p.a. payable continuously throughout life. The random variable L is defined as
L = prospective loss on contract (at duration t)
= SvU − P a¯ (6.6.1)
U
where U is the future lifetime of the policyholder, who is now aged x + t, and expenses are ignored.
Now we cannot use the formula
Var(L) = Var(SvU ) + Var(PUa¯ ) wrong!
(because SvU and P a¯ U are not independent), so we express L in terms of vU . That is,
( )
1 − vU
L = SvU −
( ) δ
PP P
= S+ vU −
δ δ
from which we obtain
( P )2
Var(L) = S Var(vU )
δ
+
(
)2
= S+P − 2 (6.6.2)
¯ A
∗ x+ A¯x+t
δ t

where ∗ indicates a rate of interest of 2i + i2 p.a. This technique may also be used for certain other
types of contracts.
We now consider a number of life assurance policies, labelled from j = 1 to j = N . The total
reserves for the group of policies is
N
L
E[Lj ] = V1 + V2 + · · · + VN (6.6.3)
j=1

where Lj and Vj are, respectively, the net liability

 and the reserve of the jth policy. If we further
assume that the lives assured are independent, L
Var   L

N = N Var(L ) (6.6.4)
L j=1 j j
j=1

where Var(Lj) may be calculated by (say) formula (6.6.2). If we now suppose that all the policies
are identical (i.e. they are of the same sum assured, type and duration, and were issued at the same

date to N different lives all of the same age), the average of the net liabilities is

 L /N (6.6.5)
L= N j

L j=1
¯
which has mean E(L) and variance Var(L)/N , where L is the net liability of a given policy. These
results are sometimes used in solvency calculations, etc. It is sometimes also assumed that N is so
N
L
large that the distribution of Lj or L¯ is approximately normal (by the central limit theorem
j=1

and related results), although this may only be accurate for very large values of N .
106 CHAPTER 6.
RESERVES
6.7 Zillmerised reserves
Let us now suppose that the premium basis is the same as the reserving basis (or is assumed to be
the same for the purpose of calculating reserves.) As stated earlier, the retrospective and prospective
methods give the same results, but reserves may not be “net premium reserves” because of the effect
of expenses. In certain important classes of policy, however, the reserve is obtainable by means of
a simple adjustment to the net premium reserve: the corresponding reserve is called a “Zillmerised
reserve”, “Zillmerised net premium reserve” or sometimes “modified net premium reserve”.
Let us consider an n-year endowment assurance for a sum assured of £1 without profits, payable
at the end of the year of death (if this occurs within the term of the policy.) There are level premiums
of P ll, payable annually in advance for n years or until earlier death of the policyholder, who was
aged x at the issue date. The reserve is required at duration t, just before payment of the premium
then due.
The premium and reserving basis includes the following allowances for expenses: expenses of e
on the payment of each premium, with additional initial expenses of I (so the total initial expense
is I + e).

Theorem 6.7.1. The reserve for the above policy is

tV Z = (1 + I)tV − I (6.7.1)
where tV denotes the corresponding net premium reserve, i.e.

tV = tVx:n =Ax+t:n−t − Px:n a¨ x+t:n−t

=1 −
a¨x+t:
n−t
a¨ x : n
Proof. We first note that the annual premium P ll is such that
ll
P a¨ x:n = Ax:n + ea¨ x:n + I

P ll − = I + Ax:n
∴ a¨ x : n
e
Now consider the reserve at duration t by the prospective method.

t V Z = M.P.V. of future benefits and expenses less premiums

ll
= Ax+t:n−t − (P − e)a¨ x+t:n−t
1 l
= Ax+t:n−t I + Ax:n
− a¨ x : n
a ˙ x+t:n−t
)
[ (
= Ax+t:n−t − I
a¨x+t:n ] x+t:n−t
Px:n − a¨x:
−t
n
a˙

(where Px:n is the net annual premium)

1a¨x+t:n−t l
= tV x:
n −I a¨ x : n

Now we use the fact that (by formula 6.4.3)

Vx:n = 1 − a¨ x+t:n
t

−ta¨ x : n
6.7. ZILLMERISED RESERVES 107

to give the formula

Z
tV = tVx:n − I [1 − tVx:n ]
= (1 + I)tVx:n − I

as required.
Notes
1. The case of a whole life policy is similarly dealt with (put n = ∞ in the above formulae.)
2. A similar argument may be used to establish formula (6.7.1) if the sum assured is payable
immediately on death and premiums are payable continuously. In this case, tV = t V¯ (A¯ x : n ).
3. Zillmer’s formula does not in general hold for other classes of policy, nor when the premium
due at time t has been paid. (It is, however, sometimes used in practice for all policies and all
durations.)
4. When the duration t is short (e.g. t = 1) Zillmer’s formula may give a negative reserve, which
should, as a rule, be replaced by zero, i.e. a policy should not be treated as an asset to the
office. Note that formula (6.7.1) gives
0V
Z
= −I
which is correct if the additional initial expense I is thought of as being disbursed before the
first premium is received: if it is not, one should write

0 VZ =0

(as is always assumed in profit-testing: see later.)

5. If the sum assured is not £1, we naturally multiply formula (6.7.1) by the sum assured: for
example, the reserve per £1000 sum assured of a whole life without profits policy might be
quoted as
1020tVx − 20
(corresponding to I= 2% ).

Example 6.7.1. Ten years ago life office issued a 20-year endowment assurance without profits to
(35). The sum assured is £10,000, payable at the end of the year of death (or on survival for 20
years), and premiums are payable annually in advance. The basis for premiums and reserves is:
A1967-70 ultimate;
6% p.a. interest;
expenses are 3% of all office premiums (including the first) with additional initial expenses of
1.5% of the sum assured.
Calculate
(i) the annual premium, and
(ii) the reserve,
(a) just before receipt of the premium now due, and
108 CHAPTER 6.
RESERVES
(b) just after receipt of the premium now due.

Solution.

(i) The office premium is

1 l
ll 10000 A35:20 + 0.015
P = a¨ 35:20
0.97
= £288.67

Note that tables at 6% interest are limited, so we use these formulae:

a¨ 35:20 20 l55
= −v 55
a¨35 a¨ l35
= 11.9969

and

A35:20 = 1 − da¨ 35:20

(ii) One may use Zillmer’s formula in this case (or other methods). The reserve is

(a) 10000[1.01510V35:20 − 0.015] = £3497

(b) £3497 + 0.97 × £288.76 = £3777 (see formula (6.2.5))

Example 6.7.2. Suppose that the policyholder of example 6.7.1 were to surrender his policy (before
paying the premium now due) and the office grants a surrender value equal to the reserve, as defined
in that question. What yield per annum would the policyholder have obtained?

Solution. The equation of value is

288.67s¨10 = 3497 at rate i=yield p.a.

∴ s¨10 = 12.11

We use the compound interest tables, i.e.

i s¨10
0.03 11.81
0.04 12.49

Interpolate:

i − 0.03 12.11 − 11.81

� = 0.44
0.04 − 0.03 12.49 − 11.81
∴ i � 3.44%
6.8. FULL PRELIMINARY TERM RESERVES. 109

6.8 Full preliminary term reserves.

We again assume that the premium and reserving bases agree, and suppose that the reserve for a
whole life or endowment assurance policy is such that
1 V =0 (6.8.1)
That is, the reserve just before payment of the second annual premium is zero. Let us again suppose
that the sum assured is £1, payable at the end of the year of death, and that expenses are as in the
previous section. We must have
ll
1V = Ax+1:n−1 − (P − e)a¨ x+1:n−1 = 0.
Hence

ll
Ax+1:n−1
P − = a¨ = Px+1:n−1
x+1:n
e −1
Hence
tV = Ax+t:n−t − Px+1:n−1 a¨ x+t:n−t
= A(x+1)+(t−1):(n−1)−(t−1) − Px+1:n−1 a¨(x+1)+(t−1):(n−1)−(t−1)
= t−1Vx+1:n−1

= the net premium reserve for the corresponding

policy on a life aged x + 1 at entry with term
n − 1 years at duration t − 1

This reserve is called the Full Preliminary Term reserve, which we shall write as tV FP T . We have
shown that
FP T
tV = t−1Vx+1:n−1 (6.8.2)
In the case of a whole life policy, we may set n = ∞ to obtain
FP T
tV = t−1Vx+1 (6.8.3)
If the sum assured is not £1, we naturally multiply these expressions by the sum assured. Similar
formulae hold if the sum assured is payable immediately on death, when premiums are payable
continuously or monthly, etc., and for certain other types of policy.

What level of initial expenses leads to a F.P.T. reserve? We observe that, by the retrospective
method,
Dx [ ]
1V FPT
( Pll − e)¨ x:1 − I − Ax:1
1
= a
Dx+1
=0
from which we obtain
P ll = e + I + Ax1:1 (6.8.4)
This states that the first premium is exactly sufficient to pay the initial expenses, I + e, and the
cost of the first year’s life assurance cover, A1x:1 .

The use of full preliminary term reserves was suggested by T. B. Sprague in 1870. Other actu-
aries (particularly in North America) have devised formulae for “modified full preliminary term
reserves”, in which the allowance for total initial expenses may be smaller than that of formula
(6.8.4), but we do not pursue this topic.
 110 CHAPTER 6.
RESERVES
6.9 Reserves for with-profits policies
We shall deal with “traditional” with profits policies only, and ignore terminal bonuses (although
these may in practice be very important.) Let us consider an n-year endowment assurance issued t
years ago to a life then aged x with basic sum assured S (payable, with attaching bonuses, at the
end of the year of death or on maturity.) We suppose that the policy was issued with level annual
premiums, and that the premium now due has not yet been paid. Reversionary bonuses are added
on the payment of each premium, and we denote the total bonus added to date by B (hence the
total death benefit in the year just ending is S + B.)
The principal methods used for calculating reserves for with profits policies are:
(1) the net premium method;
(2) the bonus reserve (or gross premium) method; and
(3) the asset share method.

(1) The net premium method. The reserve is taken to be the net premium reserve for corre-
sponding non profit policy, plus the mean present value of the bonuses already declared. In the
case of the endowment assurance policy discussed above, the reserve is given by the formulae:
WP
tV = StVx:n + BAx+t:n−t (6.9.1)
= (S + B)Ax+t:n−t − SPx:n a¨ x+t:n−t (6.9.2)
where all the actuarial functions are calculated on the given mortality and interest basis.

The rationale of this method is that the additional premiums for a with profits policy (relative
to the corresponding without profits policy) are considered to have “earned” the bonus B so far
declared, so an additional reserve is required to cover the value of these bonuses.

If the sum assured is payable immediately on death, we have

V WP = (S + B )A¯x+t:n− − P a¨x+t:n−
t
t t
(6.9.3)
where P is the annual premium for the corresponding non-profit contract, i.e.

P = SA¯x: = SP ) (6.9.4)
a¨
n x:n
(A¯x:n
Similar formulae may be given for whole life policies and for policies with monthly premiums,
etc.

Example 6.9.1. On 1st January 1993 a life office issued a with-profit assurance endowment
policy with a term of 10 years to each of 100 male lives then aged exactly 50. The basic sum as-
sured under each contract was £20, 000, and the basic sum assured, plus any bonuses, is payable
on maturity or immediately on earlier death. Level annual premiums are payable in advance
throughout the term. Among the group of policies there were 2 deaths during 1993 and 4 deaths
during 1994. There were no lapses or surrenders during 1993 or 1994. For this group of policies,
the office has declared a compound reversionary bonus of 3 43 % per annum vesting in advance on
each 1st January from outset. The office values the policies by a net premium method, using
A1967-70 ultimate mortality and interest at 3%p.a.

Calculate the total reserves which the office held for the group of policies on 31st December 1994.
 6.9. RESERVES FOR WITH-PROFITS POLICIES 111

Solution. We require 94 ×
reserve of one policy. Using the net premium method for with profits
policies,
reserve
= S[2 V(A¯ )] + B A¯
50:10 52:8
per policy

where S = 20, 000, B = 20, 000[(1.0375)2 1] (i.e. bonuses already vesting)

i.e. −

reserve
per policy = 20, −P 52:8
000(1.0375)2 A¯ 52:8 a¨
where P = net premium for corresponding non-profit policy
A¯
= 20, 000 50:10 = 1, 760.94
a¨ 50:10

[where we have used 1

A¯ -.; (A 1 )(1.03) + A 1
2
50:10 50:10 50:10
1
= (1.03) 2 (A50:10 − v10 10 p50 ) + v10 10p 50
= 0.068 + 0.68419 = 0.75219 ]

¯
∴ Reserves needed = 94 × [21, 528.125 A52:8 − 1, ]
52:8
760.94a¨

"- ..
1
8
= 03) (A 52:8
2
− v 8 p52 ) + v 8 52
(1. p 8
1
= 03)2 (0.06142) +
(1. 0.73329
=
0.79562
= £443, 417

(2) The bonus reserve method. As the name suggests, reserves are calculated on the assumption
that reversionary bonuses will be declared at certain annual rates. The value of the benefits
is therefore calculated by the formulae given in Section 3.10 above, according to the system of
bonus declarations used by the office, and the reserve is then found by subtracting the value of
the office premiums less projected future expenses. If, in the case of the endowment assurance
policy discussed above, it is assumed that future bonuses will be at the rate b per annum on the
compound system and a proportion k of future premiums will be absorbed in expenses, a formula
for the reserve is
tV
WP
= (S + B)A∗x+t:n− − (1 − k)P ll a¨ x+t:n−t (6.9.5)
t
where ∗indicates the rate of interest (i b)/(1 + b). Similar formulae may be derived for other
policies.

Since the premium valued is the actual (or office) premium for the policy, this method is some-
times referred to as the gross premium method for with profits policies.

As might be expected, the reserves calculated by the bonus reserve method depend greatly on the
assured future levels of bonus, and in the early years of a contract the method may give reserves
which are quite unrelated to the accumulation of premiums.
 112 CHAPTER 6.
RESERVES
(3) The asset share method. This has been described (for non-profit policies) in Section 6.5
above; the formulae are almost unchanged for with profit policies, the only difference being the
fact that the sum assured in each policy year includes the vested bonuses. Since these only affect
the death cost, the reserves given by the asset share method do not depend greatly on past bonus
declarations.

A complete description of the advantages and disadvantages of these methods of calculating

reserves is beyond the scope of this book.
6.10. EXERCISES 113

Exercises

6.1 (i) Express tVx in terms of Ax and Ax+t. Hence, or otherwise, find the values of nVx and
nVx+n, given that
1 − Ax+2n = Ax+2n − Ax+n = Ax+n − Ax

(ii) Calculate 1V40 given that P40 = .01536, p40 = .99647 and i = .05.

6.2 Consider an n-year pure endowment policy, issued to (x), with sum assured 1 and with annual
premiums payable throughout the duration of the policy. In the event of death within the n
years, all premiums paid will be returned without interest at the end of the year of death.
Obtain expressions for the reserve at duration t

(i) prospectively and

(ii) retrospectively.

Using commutation functions, show that your expressions are equal. (Assume that the premium
due at time t has not yet been paid.)

6.3 (Difficult)

Given that Px = 0.02, nVx = 0.06, and Px: 1

n = 0.25, find P x1: .
n

6.4 Ten years ago a life office issued a 20-year endowment assurance without profits to (35). The
sum assured is £10000, payable at the end of the year of death (or on survival for 20 years),
and premiums are payable annually in advance. Using A1967-70 ultimate 6%, and ignoring
expenses, calculate
(i) the annual premium;
(ii) the reserve, assuming that the premium now due has been paid.

6.5 (Difficult) You are given:

(i) Px = 0.01212
(ii) 20 Px = 0.01508
1
(iii) Px: = 0.06942
10
(iv) 10 Vx = 0.11430

Calculate 20
10 Vx .

6.6 A whole life assurance with sum assured £100,000 payable at the end of the year of death was
purchased by a life aged 30. The policy has annual premiums payable throughout life.
The basis for calculating reserves for this policy is as follows:
net premium method: A1967-70 ultimate, 5% p.a. interest.
Estimate the policy value at duration 2814 by interpolation.

6.7 Describe the following terms briefly:

(i) net premium reserves;

(ii) Zillmerised reserves;
6.11. SOLUTIONS 1

(iii) Full Preliminary Term reserves; and

(iv) gross premium reserves,
in each case giving suitable formulae in respect of a whole life assurance issued t years ago to
a life then aged x, with level premiums payable annually in advance throughout the term and
with a sum assured of £1 payable at the end of the year of death. Assume that the premium
now due has not yet been paid.