Critique: Reserves what, how, why?

In Jessica M’s blog about reserves she assesses the importance it is to firms to keep them. Some companies may hold reserves for an individual policy, but in most cases they hold reserves for the group they have pooled. Section 1303 of NY’s Insurance Law requires that insurers maintain reserves for the payment of losses or claims and expenses, incurred on or prior to the statement date, whether reported or unreported. The concept of reserves is basically putting the money you need in a bank account, to fund future expected claims or losses. Insurers generally have to estimate how much they need to hold in reserves, and over time the reserve becomes large enough to fund a policyholder’s loss when incurred.

Considering a life insurance policy, reserves are determined by:
tV = Ax+t – P*a(due)x+t

tV= the reserve at time t
Ax+t = future benefits
P*a(due)x+t = future premium’s paid


I agree with her that it is critical for insurance companies to hold the right amount in reserves to meet its future obligations. However, with recent developments in my family auto policy I disagree with how my insurance company fails to look at the reserves built up on my auto policy. Let’s just say that one person had a really bad year and we have held the same policy with the same company for about 30 years. Over that time my family has had less than 5 total claims, which has worked out for the insurer. Now with this bad year, they have decided to add a surcharge due to the number of points on this person’s license. The insurance company explained the surcharge was for 3 points on your license, which equals one accident. Not to mention that the surcharge is probably equal, if not more than the losses incurred to both cars.

This makes me question the point of insurance, since the person insured has to pay for their past losses in the future. I agree that since this person is a larger risk that they should increase the premium. But why should it increase when there have been almost no claims in the past and the reserves that should have been built up should have covered this year’s losses.



Links:
http://www.ins.state.ny.us/ogco2008/rg080204.htm

personal experience

http://en.wikipedia.org/wiki/Actuarial_reserves