The r% is defined as i'-i. The notes say that the i' is derived from investment income, realised gains (or losses) and some allowance in respect of unrealised gains (or losses). Why are unrealised gains (or losses) considered?
So that policyholders benefit from the rise in asset prices (that hopefully will one day be realised). (But I wouldn't worry too much about this for the exam. It's possible for a company to choose to ignore any unrealised gains or losses if they never intend to sell the asset, for example if it's a bond and will hold it until redemption.)
