1.How are the two reserves determined/calculated in Unit-Linked Business? 2.In a resilience capital requirement, how are the two reserves affected by assuming an immediate fall in the value of the matching assets? I found this part really confusing. Please help! Many thanks!
Unit reserves are calculated as the value of the assets in the unit fund (together with an adjustment for tax). Positive non-unit reserves are calculated by zeroising negative cashflows. The cashflows are the charges coming in less the expenses and any cost of guarantees going out. If your knowledge of reserving is a little rusty then it's worth spending some time revising the relevant chapters in ST2. Chapter 13 covers unit pricing, Chapter 20 (Sections 2.2 and 2.3) covers non-unit reserves. If the assets in the unit fund fall, then the unit reserves fall in the same way. The assets and liabilities are perfectly matched. If assets fall, then the non-unit reserve is likely to rise as fund management charges coming into the non-unit fund will now be lower. Best wishes Mark
