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

In the context of a unit-linked policy, what is the purpose of 'zeroisation' when calculating non-unit reserves?

Zeroisation means holding non-unit reserves so that, after allowing for reserves, no projected future non-unit cash flow is negative. Reserves are set up in earlier years to fund later strains, so the insurer does not need additional capital as the policy runs.

  1. ATo set the unit fund to zero at policy inception so that no charges are deducted
  2. BTo remove negative non-unit cash flows by holding a reserve so that the projected non-unit cash flow in each future year is not negativeCorrect
  3. CTo assume that all policyholders surrender at the end of the first year
  4. DTo set the expected profit in every future year equal to the non-unit reserve
  5. To discount the non-unit cash flows at a rate of zero per cent

Explanation

Zeroisation sets reserves so that the insurer never needs to inject capital from outside later. Reserves are built up at earlier times so that every projected future non-unit cash flow, after allowing for the reserve brought forward and carried forward, is at least zero, typically exactly zero where a strain would otherwise arise. The other options misdescribe the unit fund, surrenders or discounting.

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