Hi, In the chapter 31 practical question, 31.1 (iii), under the solution for best estimate valuation, there is this sentence : "This reserve would become more negative throughout the term until the point at which the net income first became positive (as there would no longer be years of negative income offsetting the later years of positive income)." I understand that the NUR will become more negative as the future income increases more than future outgo (as the unit value increases over time), but why did the answer mentioned it will become more negative throughout the term until the point at which the net income first become positive? I thought we will only have negative NUR when we have positive net income (income - outgo larger than 0)? Besides, would like to understand the sentence in bracket as well (as there would no longer be years of negative income offsetting the later years of positive income). Thanks in advance!
Hi Yao Kang A numerical example might help. We expect the non-unit cashflows early on to be negative as the sum at risk is high and the fund charges are low. Over time we expect the cashflows to become more positive as the fund charges grow as the fund gets bigger and the sum at risk is falling. These impact are likely to outweigh any increase in expenses. So the non-unit cashflows at the end of each year may look something like this: -6, -3, -1, 1, 3, 5, 7. Ignoring interest, mortality etc for simplicity, we would then have non-unit reserves (calculated at the start of the year) of: -6, -12, -15, -16, -15, -12, -7 We can see that the reserves become more negative in the early years as the negative cashflows drop out of the calculation (eg the second reserve is more negative than the first reserve by 6 as we included the -6 cashflow in the first year reserve but not the second year reserve). However, we see that the reserves start to increase from time 5 onwards. Now it is positive cashflows that are dropping out of the calculation (eg the fifth reserve is less negative than the fourth reserve by 1 as we included the +1 cashflow in the fourth year reserve but not the fifth year reserve). Best wishes Mark
