non-unit fund and non-unit reserves

[bensondros]

Hi,

1. For a unit-linked contract, what is the difference between a non-unit fund and a non-unit reserve? Are they completely separate? If not, how are they related? <-- just did a search on the forum, i understand how they are related now.http://www.acted.co.uk/forums/showthread.php?t=3250

2. If actuarial funding is used, then there'll be a large non-unit fund at the start. What is this non-unit fund used for, is it profit released to the company right away? <-- also answered in the linked thread above

On page 7 of chapter 14, it says "The transfer from unit-fund to non-unit fund reduces the future management charges transferred from the unit-fund to the non-unit fund, because the charge is only levied on the actual number of units purchased. It also creates an additional liability on the non-unit fund because on the death of the PH, the amount required to make up the bid value of the unit fund to the guaranteed min SA will be larger. This expected additional death cost is a charge on the non-unit fund at each year end."
3. I understand how a charge on a unit fund for mortality works, but how does a charge on the non-unit fund work? And where would this charge go?

In the example on page 9 of chapter 14, with actuarial funding, the unit fund has 540.33, and the non-unit fund has 459.67.
4. The question didn't mention initial expenses, but say if initial expenses = 1000. Does that mean that the NBS is 1000+540.33-459.67=1080.66?

Sorry if the questions don't make sense. I'm really really confused with unit-fund, and having no work experience in unit-linked contracts makes it all the more difficult!!

Thanks.

 

[Mitsukoshi]

Hi,

1. For a unit-linked contract, what is the difference between a non-unit fund and a non-unit reserve? Are they completely separate? If not, how are they related? <-- just did a search on the forum, i understand how they are related now.http://www.acted.co.uk/forums/showthread.php?t=3250

2. If actuarial funding is used, then there'll be a large non-unit fund at the start. What is this non-unit fund used for, is it profit released to the company right away? <-- also answered in the linked thread above

On page 7 of chapter 14, it says "The transfer from unit-fund to non-unit fund reduces the future management charges transferred from the unit-fund to the non-unit fund, because the charge is only levied on the actual number of units purchased. It also creates an additional liability on the non-unit fund because on the death of the PH, the amount required to make up the bid value of the unit fund to the guaranteed min SA will be larger. This expected additional death cost is a charge on the non-unit fund at each year end."
3. I understand how a charge on a unit fund for mortality works, but how does a charge on the non-unit fund work? And where would this charge go?

In the example on page 9 of chapter 14, with actuarial funding, the unit fund has 540.33, and the non-unit fund has 459.67.
4. The question didn't mention initial expenses, but say if initial expenses = 1000. Does that mean that the NBS is 1000+540.33-459.67=1080.66?

Sorry if the questions don't make sense. I'm really really confused with unit-fund, and having no work experience in unit-linked contracts makes it all the more difficult!!

Thanks.

I have the same questions above (question 3 and 4), can any tutors help with these?

Also, I now understand the difference beween non-unit fund and non-unit reserve. How about unit-fund and unit-reserve? Are they the same thing?

thanks.

 

[Mark Willder]

I now understand the difference beween non-unit fund and non-unit reserve. How about unit-fund and unit-reserve? Are they the same thing?

The non-unit fund is the non-unit assets you have ie the accumulated charges less expenses and other costs.

The unit reserve is the non-unit assets that you are required to have to meet the solvency requirements.

As long as the fun is bigger than reserves (plus any solvency capital requirement) the company is solvent and it may choose to take the excess for the shareholders.

If reserves are higher than the fund then the company will need to inject capital to meet the strain.

Best wishes

Mark

 

[Mark Willder]

On page 7 of chapter 14, it says "The transfer from unit-fund to non-unit fund reduces the future management charges transferred from the unit-fund to the non-unit fund, because the charge is only levied on the actual number of units purchased. It also creates an additional liability on the non-unit fund because on the death of the PH, the amount required to make up the bid value of the unit fund to the guaranteed min SA will be larger. This expected additional death cost is a charge on the non-unit fund at each year end."
3. I understand how a charge on a unit fund for mortality works, but how does a charge on the non-unit fund work? And where would this charge go?

I think the Core Reading is confusing here. It is not referring to a charge in the sense of a fund management charge or mortality charge. It would be better to describe it as a cost.

So all the Core Reading is saying is that the non-unit fund has to pay the cost of the excess of the bid value of units over the actuarially funded value of units when death occurs.

In the example on page 9 of chapter 14, with actuarial funding, the unit fund has 540.33, and the non-unit fund has 459.67.
4. The question didn't mention initial expenses, but say if initial expenses = 1000. Does that mean that the NBS is 1000+540.33-459.67=1080.66?

No, I'm afraid this isn't right.

The policyholder pays 1000 and the unit fund (after actuarial funding) is 540.33. So the remaining 459.67 is a charge that can be added to the non-unit fund.

The non-unit fund is equal to the charges less expenses (and possibly death costs). So the non-unit fund is 459.67 - 1000 = -540.33. So the new business strain (NBS) is 540.33.

Another way of seeing this is that NBS is initial expenses plus initial reserves less initial premium. We have a unit reserve of 540.33 and assuming the non-unit reserve is zero we then have NBS = 1000 + 540.33 + 0 - 1000 = 540.33.

Best wishes

Mark

 

[bensondros]

I think the Core Reading is confusing here. It is not referring to a charge in the sense of a fund management charge or mortality charge. It would be better to describe it as a cost.

So all the Core Reading is saying is that the non-unit fund has to pay the cost of the excess of the bid value of units over the actuarially funded value of units when death occurs.

This makes perfect sense then.

Thanks for explaining!