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For zeroisation of negative cashflows in profit testing, Can reserves ever be held at time 0?

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asked Nov 22 in BUS 3024S - Contingencies by adam (160 points)

For zeroisation of negative cashflows in profit testing, Can reserves ever be held at time 0 or do we allow the emergence of profit to be  a negative value in the first year? i.e. once we have calculated the adjusted cashflows backwards till time 2 must the cash flow at the end of the first year be adjusted ( set to zero) or be left as a negative

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answered Nov 23 by Njabulo.Dube (1,850 points)

Reserves can be held at time 0. Ideally when a product is sold and funded at inception it should be self-supporting. This means that once reserves are established in the beginning of the policy, no further reserves should be needed in future to finance any negative cashflows. This is the reason why we zerorise negative cashflows to the beginning of the policy. Therefore, all negative cashflows must be adjusted such that only one phase of financing (i.e. setting up reserves) is required, which is usually at the beginning of the policy.

Furthermore, refer to negative reserves for an explanation as to why negative reserves may not necessarily mean a profit for the company and reserving basis  which further explain why reserves at time 0 may be required for prudence.

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