Hi Does anyone know how negative sterling reserves arise under smoothed bonus funds and what the purpose of negative sterling reserves are? Thanks J
"Negative sterling reserves" can arise under unitised contracts (UL or UWP) when advance credit is taken future sterling charges (eg an allocation rate < 100%) that are designed to recoup initial expenses. A suitable surrender penalty is needed so that these charges can effectively be received on early surrender, otherwise the technique wouldn't work. The purpose is to reduce new business strain for regular premium contracts. You may wish to go back to the reserving chapters of your ST2 Notes if you'd like a reminder on this topic. Conventional contracts have also been able to have negative sterling reserves in the UK since 31 Dec 2006. The main example of this is term assurances at early durations.
