Question

Explain what is meant by a modified reserve system and contrast such systems with the Net Annual Level Premium (NALP) reserve.

Answer 1

A modified reserve system was proposed by Zillmer in which the premiums are not leveled by duration. In the net level premium reserve the net premium is leveled by duration. Modified reserves accumulate reserves that are lower in the early years when compared to the net annual level premium reserve. Modified reserves usually involve lesser premiums than the net annual level premium in the first two years. In the later years ,the premiums are higher than the net level. The reserves can be calculated prospectively or retrospectively like the net level.