Actuarial Funding vs Negative Non-Unit Reserves

[GGGGG]

I'm curious as to when Actuarial Funding would be used as opposed to Negative Non-Unit Reserves.

The Core Reading says:
"...negative non-unit reserves are an alternative to the use of actuarial funding.

As I understand it, Negative Non-Unit Reserves take credit for future charges which are expected to be over and above future expenses, reducing the required reserves at day one. Actuarial Funding takes credit for future Fund Management Charges which are set higher than they need to be to cover future expected renewal expenses.

So they seem to be two very different ways of doing the same thing, i.e. taking credit now for future expense charges which are higher than necessary to cover future expenses. Is there a reason why one method would be used instead of the other?

Thanks for any comments/explanations

 

[StephM]

Hiya,

The way I understand it is that actuarial funding is used where there are capital units and accumulation units, as a higher FMC can be used on the capital units and an actuarially funded reserve can be held here rather than the full value of the capital units.

Where only accumulation units appear we have to use negative non-unit reserves on the non-allocated units to take the larger charge into account.

Hope that helps a bit?!

No doubt an ActEd tutor will reply shortly and correct anything I've said

Steph

 

[Curious_actuary]

Hiya,

The way I understand it is that actuarial funding is used where there are capital units and accumulation units, as a higher FMC can be used on the capital units and an actuarially funded reserve can be held here rather than the full value of the capital units.

Where only accumulation units appear we have to use negative non-unit reserves on the non-allocated units to take the larger charge into account.

Hope that helps a bit?!

No doubt an ActEd tutor will reply shortly and correct anything I've said

Steph

I agree with Steph and would like to add some more to it....

Actuarial funding is the concept to be applied on the Unit Reserves and the Negative Non-unit Reserves applies to the non-unit reserves (as the name suggests).
The insurer can take credit of the future charges in both ways where applicable e.g. - For Actuarial Funding the split of Capital and Accumulation units are required. The main thing to keep in mind is that the sum of the Unit Reserves and the Non-unit Reserves should not be less than the Surrender value payable under the contract.

 

[Lynn Birchall]

Hi

I agree with both Steph and Curious-actuary

The point about actuarial funding applying on the unit reserve part (eg taking credit for future unit-related fund management charges) and negative non-unit reserves applying on the non-unit reserve part (eg taking credit for future monetary charges such as unallocted premiums) is a key one.

This follows through into the nature of the surrender penalties required: actuarial funding uses surrender penalities expresses as a % of the unit fund, negative non-unit reserves use surrender penalties expressed as non-unit / monetary amounts.

One final, picky point. Although in the past actuarial funding was done with the capital / accumulation units contract design, in principle it can be done on products with only one type of unit, provided the annual management charges on those units are sufficiently high.

Cheers
Lynn