Valuation is a process to value the net liabilities of a life insurer as of a particular date. It determines the total amount of reserve that an insurer must have to meet his obligations. It means that the valuation, firstly.
Determines the total neat liabilities of the insurer and secondly, compares his liabilities with the available funds. Ultimately, it can be revealed whether the insurer has sufficient funds to meet his obligations or not. Let’s know the valuation process of liabilities of a life insurer
Valuation process of liabilities
There are two main objectives of the valuation (i) to determine the solvency of the insurer and (ii) to determine the distributable surplus amongst the participating policyholder.
To determine Solvency: the life insurer must find out whether he has sufficient funds to meet the obligations or not. In case of insolvency, he has to curtail his expenses and increase his income.
He has to raise the premium rates and has to stop bonus distribution. Extra precaution has to be applied in restraining the outflow of funds.
To determine the divisible surplus: The excess of receipts over expenditures of a period cannot know the actual amount of profit. Science the insurer transacts a continuing business; he cannot know the exact amount of profit at a point.
The valuation comes to help the insurer at this stage. The net profit or net loss is estimated through the comparison of net liability at a particular point of time with the available funds at that time. If the funds are more than the net much will be distributed depending upon the amount of surplus at that time.
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