Chapter 11

[kimiko]

In the Practice Question 11.5 solution under "Valuation strain (capital strain) risk", it states this: "The guaranteed charges may mean that non-unit reserves have to be held at some stage during the policy, further reducing capital efficiency.", is it not true that these non-unit reserves will be held anyways and why did they specify at some stage? Can you kindly explain this sentence?

 

[Mark Willder]

In the Practice Question 11.5 solution under "Valuation strain (capital strain) risk", it states this: "The guaranteed charges may mean that non-unit reserves have to be held at some stage during the policy, further reducing capital efficiency.", is it not true that these non-unit reserves will be held anyways and why did they specify at some stage? Can you kindly explain this sentence?

Hi Kimiko
A positive non-unit reserve is only required when the expected present value of the future expenses and other costs exceed the charges.
Best wishes
Mark