24. Asset Shares

Question 1

List 9 uses of Asset Shares

Answer 1

1) benchmark for determining payout levels
2) tool for quantification of TCF
3) guide for maturity values
4) setting surrender values including MVRs
5) base AS used as a guide for minimum PRE
6) help the smoothing process for maturity values
7) guide to the appropriate level of regular bonus
8) used in sales literature and policy docs
9) establishing realistic solvency positions (peak 2 RBS)

Question 2

List 3 ways of allocation investment returns to CWP asset shares

Answer 2

1) use return on assets notionally allocated to withprofits
2) via notional returns using notional asset mix
3) use overall return on non-linked assets
4) combination of the above

Question 3

List 2 ways of adding surrender profits on Withprofits business to CWP asset shares

Answer 3

1) cashflow addition to asset shares i.e. Difference between surrender values and corresponding AS is spread among remaining policies as cashflow item
2) addition via investment return

Question 4

Outline COBS requirement for surrender profits

Answer 4

COBS requires that surrenders should not overall be a targeted source of profit

Question 5

List 2 ways of adding profits on non-profit business to CWP asset shares

Answer 5

1) via addition to asset shares

2) via investment return

Question 6

Outline ways of adding expense deductions on CWP asset shares

Answer 6

• acquisition costs: expressed as % of new business premium
• new business admin costs: allocated per policy
• renewal costs: amount per policy
• investment costs: percentage of assets or explicit deduction from assumed investment returns

Question 7

Outline ways of allowing for cost of providing life cover on CWP asset shares

Answer 7

…

Question 8

List 7 deductions from Asset Shares

Answer 8

1) Expenses Incurred
2) Commission paid
3) Cost of providing benefits in excess of AS
4) Tax including any provision for future tax liabilities
5) Transfers of profits to s/hs
6) cost of capital support
7) contribution to free assets

Question 9

Describe how s/h transfers are allowed for in CWP asset shares

Answer 9

• deduct s/h transfers from asset shares

- but withprofits business could be ring-fenced due to past M&A activity

Question 10

What would charges on CWP asset shares be in respect of?

Answer 10

• charges are deducted in respect of:
  1) cost of guarantees
  2) cost of smoothing
  3) cost of capital employed
  4) cost of building up capital base

Question 11

Describe how cost of guarantees could be allowed for in CWP asset shares

Answer 11

• using Option pricing

- or stochastic simulations for investment guarantees

Question 12

Describe how cost of smoothing could be allowed for in CWP asset shares

Answer 12

• via cost of keeping a pool of assets to support smoothing

Question 13

Describe how return on capital could be allowed for in CWP asset shares

Answer 13

• via capital charge on asset shares

- or adjusting the investment return

Question 14

Describe how tax deductions can be allowed for in CWP asset shares

Answer 14

• for I-E business use net of tax expenses and investment return

Question 15

Why are asset share calcs complicated for UWP?

Answer 15

AS complicated due to flexible premium patterns in UWP

Question 16

List 3 ways of calculating UWP asset shares

Answer 16

1) retrospective accumulation using actual expenses
2) retrospective accumulation using product charges
3) shadow fund

Question 17

Describe the “retrospective accumulation using actual expenses” method for UWP asset shares

Answer 17

• similar to CWP using actual expenses
• ok for 90/10 fund to charge expenses to p/h
• but if s/h take all non-investment surplus, then method is inappropriate

Question 18

Describe “retrospective accumulation using product charges” method

Answer 18

• primarily for policies on 0/100 basis

- difference between product charges and expenses accrue in Estate or outside WP fund

Question 19

Describe shadow fund method for UWP AS calculations

Answer 19

• asset shares calculated daily in similar way to bid value of units
• product charges are used, not expenses
• but accumulated at actual investment return
• hence asset share always available to look at

Question 20

Describe base asset share

Answer 20

• base asset share excludes allocation of miscellaneous profits and deductions of charges

Question 21

Outline 3 uses of base asset shares

Answer 21

1) base asset shares are a useful starting point if there’s discretion on amount & timing of allocations to asset share
2) base asset share can show company’s reliance on miscellaneous profits
3) base asset share can be used as a guide to the minimum value for PRE, but
- if deductions > allocations, then base asset share > full asset share, hence detrimental
- excluding capital charges would go against PRE
- excluding miscellaneous profits would also go against PRE

Question 22

Describe the requirements for asset share documentation

Answer 22

• asset share philosophy and calculation should be documented and approved by directors
• communicated to p/h via PPFM and CFPPFM
• to change principles need 3 months’ advance written notice
• practices can be changed but no advance notice needed, written notice is required

Question 23

Describe 4 aspects of withprofits business that might lead to unfairness issues?

Answer 23

1) company discretion in managing its business
2) company discretion in deciding payouts on surrender or maturity
3) imbalance between what company knows and what p/h knows
4) imbalance between company’s decision making powers and those of policyholders

Question 24

TCF requirements include 4 aspects affecting company’s asset share philosophy and calculation method. Outline the 4 areas.

Answer 24

1) Payouts should be within a target range expressed as % of unsmoothed asset share and must include 100% of unsmoothed asset share
2) Surrender values should balance interests of departing and remaining policyholders
3) Charges to WP funds are restricted
4) New Business should not be written in withprofits fund on terms adverse to interests of existing withprofits policyholders