Prudential Vs Best estimate Valuation of Non unit reserve

The approach to non-unit reserves varies from country to country. Unfortunately, as the rules are different, this leads to several possibilities.

If a best estimate approach were being used, then we would value all the cashflows. This could result in either a positive or a negative non-unit reserve, depending on whether the non-unit cashflows are mainly negative or positive.

In some countries a prudent approach must be used and negative non-unit reserves are not allowed. In this case we need to set reserves to eliminate negative cashflows. We should ignore all cashflows after the last negative.

In other countries a prudent approach must be used, but a negative non-unit reserve is allowable. In this case, we consider all the cashflows. However, to make the reserve prudent, we will overvalue the negative cashflows and undervalue the positive cashflows. The result may be a positive or negative non-unit reserve. However, due to the prudent assumptions any negative non-unit reserve will be less negative than if best estimate assumptions had been used.

I hope this helps to clarify the notes.

Best wishes

Mark