Premium Deficiency Reserves

The premium deficiency reserve is a subject which has not received due attention in the literature of the Casualty Actuarial Society. This reserve is required of certain insurance companies reporting on a basis consistent with Generally Accepted Accounting Principles (GAAP). Specifically, the purpose of the premium deficiency reserve is to renew a "probable loss" associated with unexpired portions of insurance policies in force as of the financial statement date. Current technology for the computation has been developed by the American Institute of Certified Public Accountants (AICPA) and is summarized in (computation of Premium Deficiencies in Insurance Enterprises (the Issues Paper). While AICPA issues papers do not establish enforceable standards of financial accounting, they do include advisory conclusions which represent the majority opinion of the AICPA Accounting Standards Executive Committee. The purpose of this paper is to acquaint the actuary with the technology developed in the Issues Paper and to refine and improve upon that technology.