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IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Non-unit reserves for unit-linked contracts (zeroisation)

A three-year unit-linked policy has a non-unit cashflow at the end of year 3 of -Rs 210 per policy, and no decrements are assumed. Non-unit reserves are set by zeroisation at 5% p.a. interest. What is the non-unit reserve required at the end of year 2?

The reserve is Rs 200.00. Zeroisation requires the reserve, accumulated for one year at 5%, to exactly cover the Rs 210 negative cashflow at the end of year 3, so it equals 210 divided by 1.05.

  1. ARs 210.00
  2. BRs 220.50
  3. CRs 200.00Correct
  4. DRs 190.48
  5. Rs 0.00

Explanation

With no reserve held after year 3, the end-year-2 reserve V must satisfy V x 1.05 - 210 = 0. So V = 210/1.05 = 200.00. Rs 220.50 multiplies by 1.05 instead of discounting, and Rs 190.48 discounts for two years instead of one.

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