What is Actuarial Present Value?

Actuarial present value is the present value of payments that an entity expects to pay under a retirement benefit plan to its existing and past employees for services already rendered. This is part of the information used to charge benefits to expense in the accounting records.

How is the Actuarial Present Value Concept Used?

There are several situations in which the actuarial present value (APV) concept is used, including the following:

Pricing insurance products. In life, health, and annuity insurance, APV is used to calculate premiums by determining the present value of future benefits that the insurer expects to pay. By calculating the APV of these benefits, the insurer can charge premiums that cover both the expected claims and the insurer’s profit margin.
Calculating reserves for future liabilities. Insurers and pension funds must set aside reserves to ensure they can cover future payments. The APV is used to determine the size of these reserves by discounting future liabilities to the present and adjusting for the probability of the event.
Pension planning. APV is used to calculate the present value of future pension payments, taking into account life expectancy, projected retirement age, and interest rates. It helps define the amount required in a pension fund today to fulfill future obligations.

In essence, APV is a cornerstone of actuarial work, providing a way to understand the present cost of future obligations under uncertain conditions.