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

In the zeroisation method for the non-unit reserves of a unit-linked contract, which statement correctly describes how the reserves are set?

Zeroisation reserves are worked out backwards from the end of the term. At each time the reserve is the smallest non-negative amount that prevents a negative non-unit cash flow at the following time point, so no later strain is left uncovered.

  1. AThey are set at the start of the term so that the present value of all future profits equals zero
  2. BThey are set equal to the unit fund at each time point, so that the non-unit fund is always zero
  3. CThey are found working backwards from the end of the term, holding at each time the smallest non-negative amount that avoids a negative non-unit cash flow at the next time pointCorrect
  4. DThey are found working forwards from the start, each being the previous reserve accumulated at interest
  5. They are set equal to the surrender value, with any negative cash flow carried forward

Explanation

Zeroisation starts from the end of the term, where the reserve is zero. At each earlier time the reserve is the smallest non-negative amount that stops the next year's non-unit cash flow (after the reserve is released for survivors) from being negative. This is why the working goes backwards and is floored at zero.

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