DEPARTMENTAL VALUATIONS. In making up this balance-sheet the present values of premiums receivable were found by computing the pres ent value of each premium as a life annuity due, either for life or a limited term; then, by the same mortality table and rate of interest, the net single premiums for the insurances in force were computed, these being entered as the "present value, future death-claims." Until within a century, actuaries made up these bal ance-sheets by putting in the present value of the "gross" or "office" premiums, i. e., the premiums actually charged, as a resource, while they did not charge any thing on the other side of the account, as the present value of future expenses and contingencies. This is called a "gross valuation" or a "gross premium valuation," and the meaning of the term is that the "gross premiums" have been valued as a resource.
Other actuaries entered as a liability to offset the pres ent value of the gross premiums, a sum, more or less arbitrarily determined, as the present value of expenses payable in future. Such a valuation is known as a "modified gross (or gross premium) valuation." When valuation was introduced in the United States by Elizur Wright, then Commissioner of Insurance of Massachusetts, he caused the account to be made up, in effect, as follows : The "present value, premiums receiv able," was the present value of the net premiums for the ages at which the respective policies were issued, com puted by the same mortality table and rate of interest as were used in the valuation. This amounted to the same thing as allowing the present value of the gross premiums and then charging, as a liability, the present value of all the loadings; and the rationale of it was that the assump tions upon which the loading was originally computed to provide for expenses and contingencies were deemed to have held in the past and to be certain to hold in future.
The mode of valuing by offsetting the value of net pre miums only in computing reserves is called"net valuation" or "net premium valuation." In introducing net valuation as a test of solvency it was not at first called a test of solvency but merely a measure to determine sufficiency of resources by that standard, and companies were per mitted to continue which, when tested by such, could not qualify as solvent Elizur Wright also simplified the form of the statement by taking out the item of "present value, premiums receivable," from the resources and put ting in as a liability only the excess of the "present value, future death claims," over the "present value, net pre miums receivable." This excess was the total "net re
serve" or "net premium reserve" and was also, of 139 course, the aggregate of the individual net reserves. It was called "net reserve" because it was that sum which must be held in reserve to enable the company to meet its engagements to pay mortuary losses on the basis that it will receive in future the net premiums as they become due, mortality and interest being precisely as assumed.
Department valuations are usually made as of Decem ber 31. On that date the insurances are at all stages in their respective insurance years, from being issued on December 31, and so with a full year's premium paid, to having been issued on January 1, and so with a neW pre mium due the next day. In order to get a precisely cor rect aggregate of the reserves, it would be necessary to compute the reserve for each policy at midnight Decem ber 31, accurately, and add them together. This was at first actually attempted by some actuaries, and for greater exactitude the results carried to thousandths of a dollar.
An approximation sufficiently close for all practical purposes, however, is obtained by grouping the issues of each month together and valuing the policies of that group as if all were issued on the 15th of the month. This gives what is known as mean monthly reserves. Another approximation, which also answers all practical purposes, consists in valuing all the policies as if they had all been issued on June 3o, and were, therefore, exactly six months into the current policy year in each case. This gives what is called mean reserves or mid-year reserves. The reserves of individual policies are also frequently taken to the nearest dollar, which does not materially af fect the totals.