New Business Strain
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Rishabh Surana
New business strain is the strain on the business created due to inadequate premium amounts in initial years, which are not enough to cover for the expenses, commissions and statutory reserves (and cost of capital in some calculations). In insurance, the expenses are front ended whereas returns are realized over time. However, with the premium payments being received over the cotract term this strain tend to get reduced.
New Business Strain is artificial in that it is a function of how a regulatory body, for example, might look at a life insurer’s financial position. This tends not to be realistic, but instead conservative – because that is the role a regulator plays. Assuming its pricing assumptions are robust, a company’s solvency and profitability actually increases when a new policy is written.As a result, local GAAP accounting and IFRS accounting tends to show much lower levels of new business strain than regulatory accounting.
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