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

Which statement correctly describes how non-unit reserves are set using the zeroisation method?

Zeroisation sets each non-unit reserve backwards from the end of the term as the smallest non-negative amount that, together with the accumulated expected cashflow, funds the expected next-period reserve, so no later cashflow is negative.

  1. AReserves are set at each time as the smallest non-negative amount that, with the interest-accumulated expected cashflow, funds the expected reserve at the next time, working backwards from the end of the term.Correct
  2. BReserves are set working forwards from policy inception so that profit in year 1 is maximised.
  3. CReserves are set equal to the unit fund so that surrenders can be paid in full.
  4. DReserves are set equal to the undiscounted sum of all future negative non-unit cashflows.
  5. Reserves are set so that expected profit is zero in every year, even if this needs negative reserves.

Explanation

Zeroisation works backwards from the end of the term, choosing each reserve so that the future non-unit cashflow after reserves is not negative, using the smallest non-negative amount. The other options describe a forward approach, unit reserves, an undiscounted sum, or allow negative reserves, which zeroisation does not.

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