The Insurance Reserves topic is designed to value insurance reserves as typically encountered in Belgium. (For more information on this topic, please see the insurance contracts article in the What’s New document for ProVal version 2.30.)

Belgian defined benefit retirement plans are often funded in part or in whole through insurance contracts. The provisions of these contracts affect or even define the amounts of benefits to be paid and valued. Some plans have both employer and employee contracts, some have only employee contracts, and some have neither (this last case needing no calculation of reserves). The insurance contracts are often participating contracts, in which returns in excess of the contractual guaranteed rate are credited to an additional reserve (sometimes referred to as “profit sharing”). Within ProVal, these additional balances are used to help fund benefit obligations under the plan.

Death benefits, which may or may not be included in the obligations of the retirement plan, are often funded through insurance contracts separate from those mentioned above. Calculations of the premiums and reserves for these contracts are needed, although they do not affect the benefits payable under the plan. ProVal allows calculation of these amounts during a valuation of a retirement plan.

There are three sub-topics under the Insurance Reserves topic: Employee Contracts, Employer Contracts and Death Coverage. ProVal will use information from the Employee Contracts and Employer Contracts topics to produce the #ReserveER, #ReserveEE, #ReserveERPS and #ReserveEEPS operators, which can be used in Benefit formulas. The #ReserveER and #ReserveEE operators return the projected mathematical reserve amounts for the employer and employee contracts at each decrement age, including any additional reserve in a participating contract. The #ReserveERPS and #ReserveEEPS operators return the projected mathematical reserve amounts for only the participating (profit sharing) portions of the employer and employee contracts at each decrement age. These operators have no arguments; rather, they are fully parameterized by the user inputs discussed below. The Death Coverage topic contains the parameters for the Output items Death Coverage Reserve and Death Coverage Premium. These results show the estimated reserve and premium for the death coverage contract in the valuation year (that is, the year beginning on the valuation date) or, in a Core Projection, for each valuation year.

The parameters for employee contracts are requested before those for employer contracts, because if both an employee and an employer contract exist, the employee contract “capital” will be used as an offset to the employer contract capital. As the information requested to value the insurance contracts is virtually identical regardless of the type, the employee insurance contracts dialog boxes will be discussed below, with mention of any differences that apply when employer insurance contracts are defined. Death coverage parameters do not affect, and are not affected by, employee or employer contracts.

If you click the Employee Contracts sub-topic of the Insurance Reserves topic, you will need to check the box that Employee insurance contract exists in order to make the insurance information parameters accessible. (A companion Employer insurance contract exists check box appears in the Employer Insurance Reserve dialog box.) The insurance contract parameters are separated into the following sections:

• Temporary Coverage Period (for Death Coverage only)

• Premium & Capital

• Assumptions

• Participation

• Prior contracts reflected

Temporary Coverage Period (for Death Coverage only)

This section specifies the length of the term during which death coverage is provided under the contract. For coverage with a term of one year, select 1 year. For coverage with a term of longer than one year, select until age and specify the numeric age (which must be an integer) at which coverage ends (typically age 65).

Premium & Capital

In the Premium & Capital section, a Premium formula is specified for an employee insurance contract, while a Capital formula is specified for an employer insurance contract or a death contract. The respective formulas are simply a combination of building blocks called Benefit Formula Components, linked together by ProVal operators whose functions range from performing simple addition to doing specialized date arithmetic. Here are some keys to creating the formulas:

• Premium formulas typically should reference the career average type of accrual definition. The premium, like the employee contribution in a contributory plan, is assumed to be the change in the accumulated value of the formula. Thus ProVal considers the premium to be the difference between successive annual "accrued benefits", computed according to the expression entered for the Premium formula, so if the premium changes based on service or other factors, it will be picked up. This approach allows for complex formulas such as those varying by age, service or location.

• Let accrual definitions do the work for you. For most pension plans, this type of Benefit Formula Component will automatically project service, salary, regulatory items and the like. Using accrual definitions also ensures that your benefits will be attributed correctly for each liability funding method.

• Be mindful of ProVal’s order of operations. ProVal evaluates expressions from left to right, with no precedence among the operators. For example, ProVal would calculate 1+2*3 to be 9, not 7. You may use parentheses, brackets or braces within your expressions, as required.

• Press F1 when you need help. When your cursor is in the Premium formula expression box (Employee Insurance Reserve dialog box) or Capital formula expression box (Employer Insurance Reserve dialog box), a useful list of Benefit Formula Components, database field codes and labels, available operators, etc., is only a keystroke away.

Clicking the Component Library button at the bottom left of the dialog box leads to the Benefit Formula Component Library dialog box, by means of which you can create, unhide and edit Benefit Formula Components.

For employer and employee contracts (i.e., contracts other than death coverage), ProVal is able to calculate the premium if the capital is provided and the capital if the premium is provided, but, for any number of reasons, ProVal’s calculation may differ somewhat from the current empirical capital or premium. For this reason, the database field that specifies the Current Capital (i.e., as of the Valuation Date, or baseline Valuation Date in a Core Projection) is requested for employee insurance contracts and the database field that specifies the Current Premium (also as of the Valuation Date, or baseline Valuation Date in a Core Projection) is requested for employer insurance contracts. ProVal will adjust all of its capital and premium calculations, respectively, for the difference between this empirical amount and the calculated amount.

For Death Coverage, both Amounts before renewal, the Capital amount and the Premium amount, are required. In these contracts, the change in capital is calculated as the difference between the capital formula and the prior capital amount, the change in premium is calculated each year from the change in capital, and the change in premium is summed with the prior premium to determine the new premium. The amounts before renewal are treated as being effective prior to the valuation date; the premium and reserve as of the valuation date are determined from those inputs, the result of the capital formula on the valuation date and the contract parameters. Note that for Death Coverage, the database fields should reflect the gross amounts before considering participation rates.

Assumptions

The Assumptions parameters are identical for employee and employer insurance contracts. Assumptions parameters for death coverage are the same as for the other contract types with the exception that they include a Loading factor for Capital and do not include the Payment age. Except as noted, the following information must be provided:

Interest is the contractually guaranteed interest rate, entered as a decimal (e.g., 0.05).

Payment age (for contracts other than Death Coverage) is the assumed age (e.g., 65) used in the contractual reserve calculations.

Specify the Mortality assumption by selecting from the list of Mortality Rate Tables that have been saved and unhidden in the current Project. Currently the list of available mortality tables for insurance contract calculations excludes those that are fully generational, dynamic or of the age by year of birth type.  For more information regarding tables, see Table Interface - Benefit Component and Reference Tables.

Loading: Premium is the loading rate on premiums, entered as a decimal (e.g., 0.03).

Loading: Capital (for Death Coverage only) is the loading rate on the capital, entered as a decimal (e.g., 0.0008).

Loading: Reserve is the loading rate on reserves, entered as a decimal (e.g., 0.03).

Premium: Timing indicates whether the premium payment is at the beginning or end of the payment period, where the payment period is defined by the Frequency (next parameter).

Premium: Frequency specifies how many payments, in equal installments, will be made throughout the year. The available choices are annual, semi-annual, quarterly, monthly or continuous.

Participation– Employee and Employer Contracts

The Participation parameters are identical for employee and employer insurance contracts (for death coverage, see Participation – Death Coverage below). Check the Contract includes Participation box to value the additional reserve associated with participation (commonly referred to as profit sharing in Belgium). This will make the Parameters button accessible, under which the following information is provided:

Choose whether Participation is Based on the average reserve during the year or the total reserve at the end of the year.

A database field must be provided to initialize the participation calculation at the Valuation Date (or baseline Valuation Date in a Core Projection). Indicate whether the Starting with field contains the initial participation capital or the initial reserve, and then specify the field (of parameter). ProVal will calculate the reserve, if the starting capital is provided, or it will calculate the capital, if the starting reserve is provided.

Check the box to Calculate first year dividend (commonly referred to as dotation in Belgium) if the starting capital (or starting reserve) database field data does not include the dividend, and it must therefore be calculated in the first year. If the first year dividend is to be calculated, database fields containing the Prior year Participation reserve and the Prior year Basic contract reserve must be specified. If these fields are not readily available, a database field may be populated with an estimate using ProVal’s Define Field by Table command.

Check the box to Calculate last year dividend if dividends at and beyond the Payment Age (typically age 65) should be included in the participation reserve.

The check box to specify that Recovery offset applies will be accessible if the delta capital or delta premium method is specified under the Prior Contracts Reflected section (discussed below). The box should be checked if an offset should be used in calculating the dividend.

The dividend calculation will reflect the basic contract mortality assumption if the Mortality rates apply box is checked. If the box is unchecked, the calculations will reflect interest only.

Check the box if the Delta Capital or Delta Premium method applies to the participation calculations. If the method applies, the Delta Capital and Delta Premium fields will become accessible, and a database field must be specified for at least one of these fields, in lieu of its default parameter setting, “<not applicable>.”

If participation is applicable, the participation interest rates in excess of the basic contract rate are specified in the Valuation Assumptions under the Increase & Crediting Rates topic.

Participation – Death Coverage

Check the Contract includes Participation box to reflect participation (commonly referred to as profit sharing in Belgium) in the calculation of premiums and reserves. This will make the Parameters button accessible, under which the parameters are entered: the Participation rate for Males and the Participation rate for Females, each of which is entered as a decimal number. During the valuation, ProVal will divide the gross result of the Capital formula by (1 + participation rate) before calculating reserves and premiums.

Prior Contracts Reflected

Prior insurance contracts affect the calculation of reserves (and premiums) for Employee Contracts and Employer Contracts, as well as Death Coverage contracts when the term of coverage is to a specified age (rather than 1-year term coverage).

There are three different ways to reflect prior insurance contracts in the reserve calculation: the delta premium method, the delta capital method or an explicit specification of one or more prior contracts.

Check the box if the Delta Capital or Delta Premium method applies. If the method applies, the Delta Capital and Delta Premium fields will become accessible, and a database field must be specified for at least one of these fields, in lieu of its default parameterization, “<not applicable>.” For Employee and Employer Contracts, if the basic contract includes participation (as discussed above) and the delta capital or delta premium method applies, the Recovery Offset applies option is now available (but defaults as unchecked) under the participation parameters. For Death Coverage, note that the database fields should reflect the gross amounts before considering participation rates.

If there are any prior contracts, they can be parameterized by clicking the Add button to the right of the Prior contracts expression box. The prior contract dialog box is very similar to the main contract dialog box. For ease of parameterization, all items in the Assumptions section are defaulted to their equivalent current (most recent) contract value, although, of course, all can be changed. Once a prior contract has been defined, it will be listed in the Prior contracts: text box; the contracts are listed in the order in which defined by the user. To edit a previously defined prior contract, click its descriptor. This will bring up the same dialog box used initially to define the contract.

The prior contract parameters are separated into five (5) sections: description, current values, assumptions, participation and prior contracts reflected. The parameters in each of these sections are:

• Description is a text field identifying the contract. This label will be listed in the Prior contracts text field and is also used under the Increase & Crediting Rates topic of Valuation Assumptions in the display of participation excess interest rates.

• The Current values section requests identification of the database fields that define the Capital and Premium as of the Valuation Date (or baseline Valuation Date in a Core Projection). Note that for Death Coverage, the database fields should reflect the gross amounts before considering participation rates.

• The Assumptions section includes all of the same parameters as entered for the current contract. Please see their description above.

• The Participation section includes all of the same parameters as entered for the current contract plus one additional parameter. For a prior Employee or Employer contract (i.e. not Death Coverage), the user must specify whether Participation is Credited to this prior contract (“this contract” option) or to the most recent contract, that is, the current contract (“last contract” option). If “this contract” is selected, the reserve for this prior contract will include the value of dividends on this (prior) contract, based on the excess interest rates specified under the Increase & Crediting Rates topic of Valuation Assumptions. If “last contract” is selected, all dividends on this contract will be “passed up” and included in the reserve for the main (most recent, or current) contract. Please see the discussion above for a description of the other participation parameters.

• The Prior contracts reflected section provides a check box to specify whether the Delta Capital or Delta Premium method applies to this prior contract. If so, the Delta Capital and Delta Premium fields will become accessible, and a database field must be specified for at least one of these fields, in lieu of its default parameterization “<not applicable>.” If this prior contract includes participation (as discussed above), and the delta capital or delta premium method applies, the Recovery offset applies option is now available (but defaults to unchecked) under the prior contract participation parameters.