20 Asset Shares

Question 1

State a typical definition of a with profits asset share. (5)

Answer 1

Premiums Paid
less deductions (e.g. expenses)
plus allocations of miscellaneous profits
plus any distribution of inherited estate
all accumulated at suitable rates of investment return

Question 2

List three possible sources of miscellaneous profits that may be allocated to with profits asset shares (3)

Answer 2

1. Surrender profits on with profits business.
2. Profits from non-profit business.
3. Windfall profits (e.g. unexpected tax gains).

Question 3

List 8 typical deductions that may be made from with profits asset shares. (8)

Answer 3

1. Expenses
2. The cost of providing life cover
3. Tax
4. Shareholder transfers
5. Charges for smoothing
6. Charges for options and guarantees
7. Charges for the cost of capital employed writing the contract.
8. Charges for building up the capital base.

Question 4

List five possible ways of determining the investment return to use in accumulating asset shares. (5)

Answer 4

1. The return on assets notionally allocated to with profits business.
2. Notional returns using a notional asset mix and returns on indices.
3. The overall return on the non-linked assets in the fund.
4. A combination of the above methods, combining actual asset mix with index returns or a notional mix with actual returns.
5. The return on a notionally assigned set of assets for a group of policies, where each group is assigned a different asset mix, e.g. grouped by outstanding term with policies approaching maturity being allocated less volatile assets.

Question 5

State three possible sources of surrender profits or losses on with profits contracts. (3)

Answer 5

1. Paying out surrender values less than 100% asset share on average (reflects historic practice but is no longer allowed by COBS).
2. Early duration guarantees (losses).
3. Smoothing of surrender values.

Question 6

State two possible methods of allocating surrender profits or losses to asset shares. (2)

Answer 6

1. Cashflow addition to the asset share.

2. An addition to the investment return.

Question 7

State three possible measures of the profits from non-profit business. (3)

Answer 7

1. Statutory surplus.
2. Surplus on a realistic valuation.
3. Embedded value profits.

Question 8

State two possible methods of allocating the profits from non-profit business to asset shares. (2)

Answer 8

1. Percentage % addition to the asset share.

2. Via an addition to the investment return.

Question 9

State two possible methods for allowing for the deduction of BLAGAB tax. (2)

Answer 9

1. Use net of tax investment returns and expenses.
2. Tax each policy on a standalone basis, using gross investment income (I) and expenses (E) until I > E and then use net. This approach might also allow for the deferral of tax relief by spreading acquisition expenses over 7 years.

Question 10

State two valuation bases that may be used in calculating the cost of bonus for the purpose of determining shareholder transfers (as 1/9th of this amount). (2)

Answer 10

1. A basis consistent with Solvency II assumptions.

2. A Solvency I reserving calculation retained for this purpose following the introduction of Solvency II.

Question 11

List three methods of calculating UWP asset shares. (3)

Answer 11

1. Retrospective accumulation using actual expenses. Appropriate for 90/10 business.
2. Retrospective accumulation using product charges. Appropriate for 100/0 business.
3. Shadow funding using product charges and actual investment returns.

Question 12

List four aspects of TCF that might affect a company’s choice of asset share calculation method. (4)

Answer 12

1. Payout calculations being consistent with PPFM, including the use of target ranges..
2. An approach to surrender payouts that balances the interests of departing and remaining policyholders.
3. Rules on allowable charges to with-profits funds.
4. The basis on which new business may be written.