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Fundamental of negative non-unit reserves

Hi Dukerio

Here's my take on it:

1) Negative non-unit reserves are only allowed to be held if the total reserve (i.e. unit + non-unit) is at least as big as any guaranteed surrender value. So the overall reserve will be non-negative. This means that the negative non-unit reserve just offsets against the total reserve. So what I've seen in practice is that the life company just holds overall lower reserves - the reduction arising from the negative non-unit reserve. There is thus no need for an overdraft type arrangement.

2) Negative non-unit reserves can be held if the company expects that future charges will be more than sufficient to meet future non-unit liabilities. So this would improve solvency. However, care has to be taken that prudence is still applied. The company should take care that it doesn't take too much credit for future positive cashflows since if these are in fact lower than expected, it could lead to a loss, reducing solvency.

3) It improves capital efficiency. I think, whether or not this frees up capital for writing other classes of business, depends on the company's rules on capital structure.
 
????? said:
Hi Dukerio

Here's my take on it:

1) Negative non-unit reserves are only allowed to be held if the total reserve (i.e. unit + non-unit) is at least as big as any guaranteed surrender value. So the overall reserve will be non-negative. This means that the negative non-unit reserve just offsets against the total reserve. So what I've seen in practice is that the life company just holds overall lower reserves - the reduction arising from the negative non-unit reserve. There is thus no need for an overdraft type arrangement.

2) Negative non-unit reserves can be held if the company expects that future charges will be more than sufficient to meet future non-unit liabilities. So this would improve solvency. However, care has to be taken that prudence is still applied. The company should take care that it doesn't take too much credit for future positive cashflows since if these are in fact lower than expected, it could lead to a loss, reducing solvency.

3) It improves capital efficiency. I think, whether or not this frees up capital for writing other classes of business, depends on the company's rules on capital structure.
Click to expand...

1) By guaranteed SV, do you mean the net SV after surrender penalties etc?
 
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