Zillmerisation

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Zillmerisation relates to the valuation of a Life insurer by an actuary.

Even if profitable business is written, the value of the company may worsen (when viewed from a regulatory basis) because of what is called New Business Strain. Zillmerisation is one method of adjusting the valuation calculations to ease this initial valuation strain.

[edit] History

This method was developed by August Zillmer in the late 1800s, and described in an 1863 paper entitled "Contributions to the Theory of Life Insurance Reserves".

[edit] Calculation

The process of 'Zillmerisation', or 'applying a Zillmer adjustment' involves creating a notional asset out of future premiums to the extent they will be used to pay back the initial expense outlay. Over time, the Zillmer asset is amortised as the initial expenses are effectively recouped.

More specifically when doing a net premium valuation, for a policy taken at age x, t years into the policy:

reserve = A(x+t:n-t) - NP(x:n) a(x+t:n-t) (i.e. PV of future benefits less PV of future notional net premiums)

If we assume the first year of premium doesn't count (because it's being used up on those initial costs), we can change the reserve as follows:

reserve = A(x+t:n-t) - NP(x+1:n-1) a(x+t:n-t) (i.e. PV of future benefits less PV of different notional net prem)

Since the adjusted net premium is larger, you are in effect subtracting a larger amount, producing a smaller reserve - and thus reducing the new business strain.