What Does Actuarial Present Value Mean?
An insurance company's actuarial present value is the amount of money it projects needing in order to pay for the promised benefits. This figure is based on the payments received from the insured, the interest rate, and the probable time and frequency at which they will have to provide the promised benefits.
Insuranceopedia Explains Actuarial Present Value
Insurance regulations require insurance companies to keep a financial reserve to ensure that they will be able to pay for the coverage they have issued.
Insurance companies make sure they can handle the claims that will be submitted to them in the future by continuously calculating the money they will need to have in order to cover the risks they have insured. One way of doing this is by calculating the company's actuarial present value. This figure is based on the amount the company anticipates collecting in premiums, the amount they predict having to pay out in claims, and possible changes to the insurance rate.