Legal Definitions - mean reserve

Mean reserve refers to an actuarial calculation primarily used in the insurance industry. It represents the average of the policy reserve held by an insurance company at the beginning of a specific period (typically a policy year) and the policy reserve held at the end of that same period. Insurance companies establish reserves as a financial safeguard, setting aside funds to ensure they can meet future obligations, such as paying claims and benefits to policyholders. The mean reserve provides a smoothed-out, representative value of this liability over the defined period, which is often utilized for purposes like financial reporting, tax calculations, and regulatory compliance.

• Example 1: Annual Financial Reporting

  A life insurance company is preparing its annual financial statements. For a particular whole life insurance policy, the actuarial team determines that the reserve at the start of the policy's tenth year was $20,000, and at the end of that tenth year, it had increased to $22,000. To reflect the average liability for this policy during that year in their financial reports, the company calculates the mean reserve: ($20,000 + $22,000) / 2 = $21,000. This $21,000 figure is then used as the reserve value for that policy in the company's financial statements for that specific year, providing a balanced representation of the liability over the reporting period.

• Example 2: Tax Calculations for Annuities

  An insurer needs to calculate its taxable income and determine the deductible reserves for a block of annuity contracts. For a specific deferred annuity, the reserve at the beginning of the tax year was $75,000, and by the end of the tax year, it had grown to $78,000 due to investment returns and additional premiums. The mean reserve for this annuity during the tax year would be ($75,000 + $78,000) / 2 = $76,500. This average figure is often the amount recognized by tax authorities as the reserve liability for that period, directly influencing the company's tax obligations.

• Example 3: Valuation of a Policy Portfolio for Acquisition

  When a large insurance corporation is considering acquiring a smaller competitor, it must accurately value the competitor's existing policy portfolio. For a group of universal life policies, actuaries assess the reserves. For one such policy, the reserve at the beginning of the valuation period was $30,000, and it is projected to be $33,000 at the end of the period. The mean reserve of ($30,000 + $33,000) / 2 = $31,500 would be used as a fair average representation of the policy's liability during that period, contributing to the overall valuation of the company's assets and liabilities for the acquisition.