Skip to content

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

In calculating non-unit reserves for a unit-linked contract by zeroisation, which statement describes the reserve requirement correctly?

Zeroisation sets non-unit reserves, working backwards from the last negative cash flow, so that no future non-unit cash flow is negative. A reserve is held only where needed to fund a later negative flow, not equal to the present value of all flows.

  1. AReserves are set up so that no future non-unit cash flow in the projection is negative, working back from the latest negative cash flow and holding a reserve only where neededCorrect
  2. BReserves are set equal to the unit fund value so that the non-unit fund is always zero
  3. CReserves are set equal to the present value of all future non-unit cash flows, whether positive or negative
  4. DReserves are set so that the expected profit in the first policy year is zero
  5. Reserves are set to the accumulated value of past premiums less claims

Explanation

Zeroisation works back from the end of the projection. Each reserve is just enough to remove any negative non-unit cash flow at the following time point, so no further capital is needed. A reserve is held only where a later negative cash flow would otherwise arise, not for the present value of all cash flows, which would let positive flows offset negatives in a way the method does not allow.

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