In the example question, it is mentioned that for single premium version, supervisory reserve is bound to be positive. Why is it the case? Whereas for annual premium version, it mentions that loadings included would offset the the initial loss by reducing the reserve and in theory it could be negative but won't be due to regulatory requirements being that negative reserves are not allowed. So, for annual premium policy, loadings included could lead to negative reserves being held? But for single premium contract, where all the premiums are paid upfront, why are reserves bound to be positive?
Hi Yash A prospective reserve is the present value of the future claims plus expenses less the premiums. So a single premium policy must have a positive reserve once it's started as there are no more premiums to pay. A regular premium policy can have a negative (positive) reserve if the value of the future premiums is bigger (smaller) than the value of the future claims and expenses. Best wishes Mark
