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

A unit-linked policy issued by an Indian insurer has an annual premium of Rs 20,000 at the start of each year. The allocation is 80% of premium in year 1 and 100% thereafter. Expenses at the start of year 1 are Rs 6,000 and nil afterwards. Ignoring all other items, what is the non-unit cash flow at the start of year 1 (before any reserve)?

The non-unit cash flow is Rs -2,000. Twenty per cent of the Rs 20,000 premium, Rs 4,000, is not allocated to units and is income to the insurer, and expenses of Rs 6,000 are deducted, leaving a negative cash flow of Rs 2,000.

  1. ARs -6,000
  2. BRs -2,000Correct
  3. CRs 4,000
  4. DRs -10,000
  5. Rs 2,000

Explanation

Unallocated premium = 20% of 20,000 = 4,000. Non-unit cash flow = 4,000 - 6,000 = -2,000. Rs -6,000 ignores the unallocated premium, Rs 4,000 ignores expenses, Rs -10,000 subtracts 4,000 instead of adding it, and Rs 2,000 reverses the sign.

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