Hi, Why don't we consider transfer of reserves when we are projecting the expected cashflows for unit linked end. assurance plan in example 2? In the example, the benefit paid out to the customer is "bid value, at the time of death, of the units purchased, subject to a minimum guaranteed sum assured of S". Technically, isn't the difference between S and the bid value a non-unit benefit? In that case, shouldn't we be setting aside a reserve for that benefit? Thanks! Regards, Sunil
Hi padasala, With unit-linked contracts you are right that S - bid value of units is the excess that must be paid on death. This is a cost to the company that will be a negative in the £ fund. Sometimes we have unit-linked questions where we simply take this cost as it happens and work out the NPV. You are right that it is a principle of prudent financial management that we should set up £ reserves to zeroise negatives coming through in the future. So, if this cost is leading us to a negative in our profit vector, we could happily set up £ reserves to deal with this. Some questions ask you to do this. So, it really all depends on whether the question asks you to, Good luck! John
