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in BUS 3024S - Contingencies by (340 points)
What is the difference (if any) between a policy value and a reserve?

1 Answer

+1 vote
by (920 points)
A policy value is defined as the expected value of future outgo less expected present value of future inflow for a policy. A reserve is defined as the actual amount you hold in respect of the liability. 

A policy value is simply a theoretical concept that can be used as a method of deciding how much you should hold as reserves. 

However other methods instead may be used to determine how much to hold as a reserve such as:

- Holding a certain % of policy reserve 

- Holding a % of net/gross premium (as you may have seen in a profit testing example)

- Holding a reserve to meet future losses with a certain level of confidence, for example a 99% VaR reserve (outlined in DHW)