On the Nature of Risk Reduction in Reserve Valuation: Evidence from the Korean Market

In life insurance practice in most countries, companies are required to calculate statutory policy reserves using a mortality table which incorporates some safety margins by sex, age, or in force period. While considered to be prudent to hedge against adverse mortality experience, this practice ignores risk diversification inherent reserve valuation. In this paper, a statistical inference model is derived to address the nature and magnitude of the portfolio effect. The valuation results inferred with the highest level of confidence suggest that the portfolio effect is apparent especially in portfolios of relatively small numbers of in force contracts, and stabilizes after a certain size of portfolio, approximately 200,000 in force contracts for the sample case used in this paper.