Capital Requirements - Contract Design

[LennyA]

Hi,

In chapter one on Endowment Assurances for Section 3.3 on Capital Requirements, under the Contract Design heading we have the paragraph

The key issue in contract design, as far as capital requirements are concrenerd, is whether the design enables reserves and solvency capital requirements to be kept low. Broadly speaking, the lower the initial reserves, the lower the initial capital requirement. The slower the increase in reserves over the contract's term, the faster any invested capital is released. This issue therefore interacts with the issue of how supervisory reserves are calculated

I don't understand the part that I have made bold in this paragraph. Could someone please explain what it means?

 

[Lynn Birchall]

Hi Lenny

Hope your ST2 studying is getting of to a good start.

We can imagine the capital being released at the end of each year of the policy as being the excess of:

positive cashflows (premiums in and investment return)​

over

negative cashflows (expenses, claims, and increase in the reserve needed).​

The slower the reserves build up, the smaller the total negatives, and so the sooner the capital is released.

Hope this helps clarify.
Lynn