ct5 Q&A 4.15

[Jiang Kaijie]

I have two confusions:
1. The question mentions that the company holds unit reserves equal to the value of units, but the answer doesn't consider any reserve for the unit fund. Therefore, I wonder what's the meaning of the reserves mentioned in the question.
2. there is no information about the rate of interest at which the non-unit fund earns. However, the answer just uses the interest rate 5% for the unit fund.

this question is quite weird...
anyone can help me
Thanks a lot.

 

[Mohit Gulati]

when a company make the reserves for traditional contracts, that means company invests that much money in some kind of
investment or saving or fixed deposit. that means suppose in case of conventional whole life assurance if suppose the
reserve comes to be 8000 so company will take that much money and invest in some debt fund or some fixed deposit or
any kind of secured investment product. so that will be an outflow to company and that is why we consider them as cost
of reserves.
but when we talk about the ulip plans so the money is already invested in some kind of investment, since ulip are market
linked so money is already invested in some mutual funds or stocks or any other instrument. so the insurance company
donot need to make any explicit reserve and that is why there is no cost of reserve or cost of increase in reserve.

as far as your second question is concerned in some of the question they have given separate interest rates
like for non unit funds there is separate interest rate, for unit fund there is separate growth rate, for making reserve
they have used separate interest rate, for calculating net present value there is separate interest rate.

if you see at the end they have used 5% interest rate for non unit funds also, so when no other interest is given so we have to use the same interest rate as for unit fund,