hi all, i cant make sense of this, can someone explain this to me in plain language
The way I interpreted: Point view of a life insurance buyer, cash value = asset and policy reserve = liability. Therefore, when interest rates are high (desintermediation), perception of assets vs liability mismatches, insurance buyer will prefer to get the cash and invest somewhere else…
As per above, I believe they are either one in _ and _ the same, or closely aligned, where the “cash value” IS the “policy reserve” from the point of the policy owner. The policy reserve is therefore a liability to the insurer. Hence, the insurer must earn a rate on their investments >= to credited rate (rate the cash value accumulates to policy owner) so they can pay that cash value (policy reserve) eventually.
Policy reserve does not have to equal cash value. Reserve is what the insurer has to hold as liability when projecting future cash inflows and outflows under all policies. Cash value (less surrender chaeges) is paid to policyholder in event of surrender or from which policyholder can borrow, if allowed under contract terms.