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

Which statement about setting non-unit reserves by zeroisation for a unit-linked contract is correct?

Zeroisation works backwards from the end of the term. At each time the non-unit reserve is the amount that, with interest and survival allowance, is just enough to meet any negative cash flow at the next time after allowing for the next reserve, so no later strain arises.

  1. AReserves are always zero because unit liabilities are matched by the unit fund
  2. BReserves are worked back from the end of the term, and the reserve at time t is the amount needed so that, with interest and survival, the cash flow at time t+1 is not negativeCorrect
  3. CReserves are determined by running forward from policy inception and are the highest accumulated loss
  4. DReserves must equal the value of the unit fund
  5. Reserves are set by taking the present value of all future non-unit profits

Explanation

Zeroisation works backwards from the end of the term. At each time the reserve is the amount that, accumulated with interest and allowing for survival, covers any negative cash flow at the next time after including the next reserve. Reserves are held in addition to unit reserves, and a present value of profits would be negative-strain netting, which zeroisation specifically avoids.

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