Disclosing the Reserving Process in Life Insurance Through Equivalent Periodic Fees

In the liability-driven life business (i.e., with fixed or participating benefits), the understanding of the reserving process may be out the reach of the policyholder, due to the actuarial principles on which the valuation is based. In particular, the coherence between the costs described under policy conditions and the amount accumulated into the policy reserve may be lost. When the life policy is mainly viewed as an investment by the policyholder, alternative investments may be considered (perhaps erroneously) more convenient and convincing, as their dynamics appears more intuitive. We show that, based on the information available to the policyholder, the reserve dynamics can be reinterpreted in terms of equivalent periodic fees charged to the value of the policyholder’s investment. Most policyholders should understand the meaning of a periodic fee, thus gaining greater awareness of the protection provided by life policies, as well as better insights on their costs.