Hi On page 9 of the chapter it states that regulators may specify that negative non unit reserves can only be held, if 3 conditions hold. The first and last make sense. The 2nd, could this be rephrased as: the aggregate net expected cashflow across all policies that contribute to the non unit reserve cannot be negative at any duration. I think this is equivalent because if they were negative at any point then the negative reserve would at some point mean we would be taking credit for profit which had not yet arisen. Could you confirm if this is equivalent? Thank you, Rachael
Hi A follow up question. In the notes it says that for best estimate valuations that all future non-unit cashflows are used and that there would be no other restrictions. Does this mean the 3 restrictions stated would apply but there would be no further restrictions or that there would be no restrictions at all? Thank you
Hi Rachael I don't this is equivalent. The 2nd condition relates to the idea that if we're holding negative non-unit reserves we can view these as a loan from policies which have positive reserves. The loan needs to be repaid (ie the future profits need to emerge) in order for the company to have the full reserves back for those other policies when it expects to need them. Aggregating cashflows across all our policies with negative non-unit reserves isn't doing any type of check against the 'loan' being repaid in time for those policies with positive reserves.
