Analysis of Term Life Insurance Reserves Using the Full Preliminary Term and Fackler Method with an Extended Vasicek Interest Rate Based on Ordinary Least Squares

Abstract

Premium reserves have an essential role in maintaining financial sustainability and risk control in life insurance companies. This study aims to analyze the calculation of premium reserves for term life insurance products using the Full Preliminary Term (FPT) and the Fackler method under stochastic interest rates modelled by the Extended Vasicek model. The novelty of this study lies in integrating an Ordinary Least Squares (OLS) estimated Extended Vasicek interest rate model with two different premium reserve methods, namely FPT and Fackler, using historical Bank Indonesia benchmark interest rate data for 2010-2025. The results show that the FPT method produces a zero reserve in the first year and reaches a maximum reserve of IDR 2,308,267 in the 9th year, whereas the Fackler method reaches a maximum reserve of IDR 2,507,184 in the 9th year. Both methods produce a reserve of zero at the end of the 15-year coverage period. These results demonstrate that the Fackler method generates higher reserves than the FPT method during policy years 1 to 14, while the absolute difference between the two methods gradually decreases as the policy approaches maturity.