What formula is used to calculate the Net Amount at Risk (NAAR)?

The formula for calculating the Net Amount at Risk (NAAR) is based on understanding the relationship between the death benefit of an insurance policy and the investment account value, particularly in the context of policies that have an investment component, such as universal life insurance.

NAAR represents the amount of risk that the insurer retains at the time of the policyholder’s death. In this context, it is determined by subtracting the investment account value from the death benefit. Essentially, it shows the net liability that the insurance company would face if the insured were to pass away. When the death benefit is greater than the investment account value, the NAAR accurately reflects the amount the insurer would have to pay out. This trimodal assessment of risk helps actuaries and insurers manage and price the life insurance product efficiently.

In contrast, the other formulas do not accurately reflect the concept of risk being assessed. For instance, adding the investment account value to the death benefit does not represent a loss or net risk situation. Therefore, focusing on the subtraction as per the correct formula is crucial for clear financial and insurance practice understanding.