Unwinding means taking the business one year forward in case of assumptions.
e.g. Let’s say to cover someone for 3 years for sum of 1,00,000 Rs. with a one time premium.
Assuming a reference rate (prevailing G-sec yield etc.) of 10%, the premium today comes to 75,131 by reverse discounting.
But to mitigate risk, you only assume reference rate to be 5% while determining premium. This way premium come to 86,383.
Now when you unwind position after 1 year, following happens →
You got premium paid of 86,383. The reference rate is 10%, so sum becomes 94,933.
The liability at 5% for next 2 years comes to 90,702.
The difference between the two is your unwind at reference rate = 94933 - 90702 = 4231.
If reference rate moves to 12%, you make unwind which will be more than reference rate.
Hence you will see two parts of unwind in reports - 1) at reference rates 2) at rate in addition to reference rates.
The unwind in the books of life insurance companies is a complicated version of above example.
Here is the presentation we did on life insurance industry last year →
Hope this helps.