Negative Non-unit Reserve

Discussion in 'SP2' started by Avviey, Jun 28, 2009.

  1. Avviey

    Avviey Member

    Hi,

    The example on page 9 of Chapter 20 gives the calculation of negative non-unit reserve. Can anyone tell me why at time 1, non-unit reserve will be set to -4 as surrender penalty is 4 during that year? But why didnt the example mention surrender penalty amount at time 3 and 2? And thereby at time 0, reserve of -1 is OK since the surrender penalty is 5 during that year.

    Thanks very much.
     
    Avviey, Jun 28, 2009
    #1
  2. Lynn Birchall

    Lynn Birchall ActEd Tutor Staff Member

    Hi

    The check that's being done at any point in time is that:

    total reserve > surrender value
    ie (unit fund + non-unit reserve) > (unit fund - surrender penalty)

    At times when the non-unit reserve is positive (such as time 3 and time 2), this will automatically be true, so we don't have to mention checking the surrender penalty.

    We only need to check that the surrender penalty is bigger than any negative non-unit reserve.

    Hope this helps
    Lynn
     
    Last edited: Jul 12, 2009
    Lynn Birchall, Jul 12, 2009
    #2
  3. Avviey

    Avviey Member

    total reserve > surrender value
    ie (unit fund + non-unit reserve) > (unit fund - surrender penalty)


    Hi Lynn,

    I got it vaguely. The thing is you are not told the unit reserve here, only the total reserve calculated to zeroize the last cashflow at time 5. Unless, unit reserve is represented by the series of projected end-yr future cashflow? Can you please confirm?

    Many thanks.
     
    Avviey, Jul 13, 2009
    #3
  4. Lynn Birchall

    Lynn Birchall ActEd Tutor Staff Member

    Hi again

    The projected future cashflows that we're using are the non-unit cashflows (not the total policy cashflows or the unit cashflows).

    This means that we don't need to know the unit reserve / unit fund as (whatever amount it is) it is the same on both sides of the inequality.

    Hope that's a bit clearer :confused:
    Cheers
    Lynn
     
    Lynn Birchall, Jul 13, 2009
    #4
  5. Avviey

    Avviey Member

    Many thanks, Lynn.
     
    Avviey, Jul 13, 2009
    #5
  6. kze

    kze Keen member

    Hi, it says at step (3) : "even if the cashflow is positive set the non-unit reserve as a negative amount"

    if the cashflow at time 5 is negative, say -1, is the reserve then still -1?
     
    kze, Dec 22, 2018
    #6
  7. Lynn Birchall

    Lynn Birchall ActEd Tutor Staff Member

    Hi

    A negative cashflow (-1) means the company having a liability to pay out an amount of 1. This would lead to a positive reserve of +1 being required at this point in time.

    If there was a positive cashflow of +1 (ie the company would be receiving the cashflow), then a negative non-unit reserve of -1 could be used (provided any local regulations on this were met).

    Hope this helps clarify things.

    (PS I notice the original posts and answers are now quite old - there have been some changes to this material in the intervening years, mainly relating to the conditions under which negative non-unit reserves might be allowed).
     
    Lynn Birchall, Jan 2, 2019
    #7

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