What Is the Value of in-Force?

Malcolm Tatum

"The value of in-force" is a term that is often used in the insurance industry, particularly with life insurance. This term specifically has to do with the amount of current or present value of the profits that owners and investors of the life insurance company anticipate will be realized from a group of life insurance policies over a period of time. Projecting this figure is key to insurance providers, since it helps to determine if the provider will remain solvent over the long term and generate some sort of profit above and beyond honoring claims submitted by customers.

"The value of in-force" is a term that is often used in the life industry industry.
"The value of in-force" is a term that is often used in the life industry industry.

Since providing life insurance is considered a type of in-force business, owners must project the revenue stream, operational costs and ultimately the net profit that is realized from the business endeavor. This process involves considering the present value of all the policies currently written and projecting what type of revenue will be generated from those policies up to the point of settling claims on those insurance contracts. Doing so makes it easier to determine if new policies are being written at a pace that helps to balance the payouts, effectively keeping the company solvent. It also helps to determine if the investments held by the insurer are producing a sufficient return to help support the overall business model. When this is the cause, the value of in-force is considered positive and the provider is highly likely to remain in business.

Calculating the value of in-force requires identifying the current present value of life policies current written, with an eye toward the amount of premiums that are generated by those policies. When paired with the returns from the investment of those premiums, the resulting revenue stream can be compared to expenses and it will be possible to determine what if any changes in current strategies must be made in order to sustain the operation. Typically, insurance providers will calculate the value of in-force on a regular basis, making sure the volume of new policies written is sufficient to offset the number of policies that have been settled since the last calculation.

The frequency of determining the value of in-force will vary somewhat. It is not unusual for some insurance providers to project this value at the end of each billing period. Others may choose to determine this figure on a quarterly basis. The frequency is sometimes determined based on the rate of turnover in new policies to settled policies that occur on average per accounting month.

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