Bonus Reserve Valuations

Extract

The question whether the net premium method of valuation, now almost universally adopted by offices distributing their profits in the form of reversionary bonuses, should be regarded as a final and scientific method of ascertaining divisible profits or as merely a temporary expedient which must, in the words of Mr. Sorley, “inevitably disappear before the advance of true actuarial science”, is one which has frequently engaged the attention of actuaries. The importance of the subject is so great to all connected with the administration of Life offices that in the hope of provoking an interesting and useful discussion on the general question, I venture to submit the following notes on an alternative method of valuation, based on a suggestion by Mr. Manly (in the discussion on Mr. Warner's paper on the Net Premium Method of Valuation reported in the 37th volume of the Journal, p. 57), that in the valuation balance sheet the present value of the bonus at the rate to be declared at a given valuation should be treated as a liability for the future existence of the policies.

As the alternative method is, to some extent, based on the original principles of the net premium method, I propose, as briefly as possible, to summarize the modifications which have been introduced in the last 30 years in the principles and application of the net premium method.