Statutory reserve
Encyclopedia
In the business of insurance
, statutory reserves are those liabilities an insurance company is legally required to maintain on its balance sheet
with respect to the unmatured obligations (i.e., expected future claims) of the company.
industry, statutory reserves are most commonly computed using the Commissioner's reserve valuation method. or CRVM, the method prescribed by law for computing minimum required reserves.
The size of a CRVM reserve is affected by the age and sex of the insured person, how long the policy for which it is computed has been in force, the plan of insurance offered by the policy, the rate of interest used in the calculation, and the mortality table with which the actuarial present value
s are computed.
The Commissioner's reserve valuation method was itself established by the Standard Valuation Law (SVL), which was concocted by the NAIC
and adopted by the several states shortly after World War II. The first mortality table prescribed by the SVL was the 1941 CSO (Commissioner's Standard Ordinary} table, at a maximum interest rate of 3½%. Subsequent amendments to the Standard Valuation Law have permitted the use of more modern mortality tables and higher rates of interest. The effect of these changes has in general been to reduce the amount of the reserves which life insurance companies are legally required to hold.
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
, statutory reserves are those liabilities an insurance company is legally required to maintain on its balance sheet
Balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...
with respect to the unmatured obligations (i.e., expected future claims) of the company.
Life insurance
In the U.S. life insuranceLife insurance
Life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger...
industry, statutory reserves are most commonly computed using the Commissioner's reserve valuation method. or CRVM, the method prescribed by law for computing minimum required reserves.
The size of a CRVM reserve is affected by the age and sex of the insured person, how long the policy for which it is computed has been in force, the plan of insurance offered by the policy, the rate of interest used in the calculation, and the mortality table with which the actuarial present value
Actuarial present value
In actuarial science, the actuarial present value of a payment or series of payments which are random variables is the expected value of the present value of the payments, or equivalently, the present value of their expected values....
s are computed.
The Commissioner's reserve valuation method was itself established by the Standard Valuation Law (SVL), which was concocted by the NAIC
National Association of Insurance Commissioners
The National Association of Insurance Commissioners is an Internal Revenue Code Section 501 non-profit organization which seeks to organize the regulatory and supervisory efforts of the various state insurance commissioners from around the United States. The NAIC was formed in 1871. Its current...
and adopted by the several states shortly after World War II. The first mortality table prescribed by the SVL was the 1941 CSO (Commissioner's Standard Ordinary} table, at a maximum interest rate of 3½%. Subsequent amendments to the Standard Valuation Law have permitted the use of more modern mortality tables and higher rates of interest. The effect of these changes has in general been to reduce the amount of the reserves which life insurance companies are legally required to hold.