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

In the zeroisation approach to reserving for a unit-linked policy, what is the non-unit reserve at each time point chosen to be?

The non-unit reserve is the smallest amount that, together with the interest it earns and the survivors' release, keeps the next year's projected non-unit cash flow from being negative. It is built up backwards from the end of the term.

  1. AThe smallest amount that makes every projected non-unit cash flow at the following time point nil or positive after allowing for the reserveCorrect
  2. BThe unit fund value at that time less the surrender charge
  3. CThe present value of future office premiums less future benefits at the pricing basis
  4. DThe amount equal to the policyholder's accumulated premiums
  5. The expected value of future management charges only

Explanation

Zeroisation sets non-unit reserves, working backwards from the end of the term, so that the projected non-unit cash flow in each year is not negative. Reserves are the minimum needed to avoid negative cash flows, which is not a prospective premium-benefit value or a unit fund amount.

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