Chapter 23

Question 1

Purpose of reserves

Answer 1

1. Demonstrate solvency to the supervisory authority
2. Investigate the true/realistic position of the company

Question 2

Unit reserve

Answer 2

The part of the reserve that the life company needs to set up in respect of its unitized contracts. The unit reserve represents the liability in terms of unite held under the contract
Unit fund= # of units x bid price of units

Question 3

Non unit reserve

Answer 3

Present value of the excess of non-unit outgo over non-unit income

Question 4

Conditions for setting up a negative non-unit reserve

Answer 4

1. Unit reserve + non-unit reserve > surrender value
2. The future profits arising on the policy with the NNR need to emerge in time to repay the loan. I.e.|NNR|< surrender penalty
3. After taking account of future non-unit reserves, there should be no future negative cash flows for the policy (no future valuation strain)
4. In aggregate, the sum of all non-unit reserves should not be negative

Question 5

Features of gross premium method

Answer 5

1. Explicit allowance is made for expenses
2. Explicit allowance is made for future bonuses
3. Reserves tend to be sensitive to a change in basis
4. Reserves may initially be negative for non-linked business, partly due to initial expenses and partly due to capitalizing the expected future profit
5. The future premiums valued are the actual (office) premiums expected
6. Any difference between the pricing and valuation bases will immediately be taken as profit or loss

Question 6

Features of net premium valuation method

Answer 6

1. Implicit level allowance for future expenses
2. Implicit level allowance for future bonuses
3. For regular premium business, the reserves we relatively insensitive to changes in the valuation basis
4. Mainly used for conventional with-profits, as it does not capitalize the profit margins in the future gross premiums
5. Simple (formula and data required)
6. Not appropriate for single premium business without adjustment