Skip to content

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

A unit-linked policy is being reserved by zeroisation. Which description of the non-unit reserve at the end of year t is correct?

Zeroisation reserves are the smallest non-unit amounts that make every future year's non-unit cashflow, after setting up the reserve, non-negative. They are calculated backwards from the end of the term, so any future negative cashflow is funded in advance. This differs from net premium valuation.

  1. AThe smallest reserve that, with the year's non-unit cashflow, keeps the non-unit cashflow at the end of each future year from being negative, working backwards from the end of the termCorrect
  2. BThe unit fund value at the end of year t, since unit reserves cover all liabilities
  3. CThe present value of future premiums less the present value of future benefits on a net premium basis
  4. DThe accumulated value of past profits discounted at the risk discount rate
  5. The reserve equal to the surrender value at time t

Explanation

Zeroisation sets non-unit reserves so that no future year's profit signature is negative. The reserve is found recursively, backwards, as the amount needed to fund any strain in the next year after allowing for interest and survivorship. A net premium reserve is a different concept used for traditional contracts.

Did you get it right without looking?

One question tells you little. A timed set on Non-unit reserves for unit-linked contracts (zeroisation) shows your real accuracy, how long you take and where you lose marks.

Practise Non-unit reserves for unit-linked contracts (zeroisation)Free diagnostic mock

More Non-unit reserves for unit-linked contracts (zeroisation) questions