Hi, I just wanted to make sure I completely understand the BEL calculation of a unit linked contact. Unit reserve can simply be unit price x number of units but it's the non unit reserve I'm struggling with. We essentially need the cash flows into and out of the non unit fund which requires projecting the unit fund. What investment return assumption would be used here? Is that best estimate or risk free? Or is it only when valuing a financial guarantee attached to the product that we would use a risk free investment return? Thanks Daryl
Hi Daryl, We use the expected return of the assets underlying the unit fund to project the unit fund forward. The non-unit reserves are discounted using the risk free rate. We would normally use the risk free rate to discount liabilities when calculating BEL. Unless it's risk free rate + premium (to allow for volatility/mismatching adjustment in a S II BEL calc). Mandlizy
Hi Please note, we would use the risk-free return (possibly with a VA adjustment) on the unit fund as well if it is on a market-consistent basis. Thanks Em
