24. Asset Shares Flashcards
List 9 uses of Asset Shares
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)
List 3 ways of allocation investment returns to CWP asset shares
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
List 2 ways of adding surrender profits on Withprofits business to CWP asset shares
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
Outline COBS requirement for surrender profits
COBS requires that surrenders should not overall be a targeted source of profit
List 2 ways of adding profits on non-profit business to CWP asset shares
1) via addition to asset shares
2) via investment return
Outline ways of adding expense deductions on CWP asset shares
- 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
Outline ways of allowing for cost of providing life cover on CWP asset shares
…
List 7 deductions from Asset Shares
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
Describe how s/h transfers are allowed for in CWP asset shares
- deduct s/h transfers from asset shares
- but withprofits business could be ring-fenced due to past M&A activity
What would charges on CWP asset shares be in respect of?
- 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
Describe how cost of guarantees could be allowed for in CWP asset shares
- using Option pricing
- or stochastic simulations for investment guarantees
Describe how cost of smoothing could be allowed for in CWP asset shares
- via cost of keeping a pool of assets to support smoothing
Describe how return on capital could be allowed for in CWP asset shares
- via capital charge on asset shares
- or adjusting the investment return
Describe how tax deductions can be allowed for in CWP asset shares
- for I-E business use net of tax expenses and investment return
Why are asset share calcs complicated for UWP?
AS complicated due to flexible premium patterns in UWP
List 3 ways of calculating UWP asset shares
1) retrospective accumulation using actual expenses
2) retrospective accumulation using product charges
3) shadow fund
Describe the “retrospective accumulation using actual expenses” method for UWP asset shares
- 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
Describe “retrospective accumulation using product charges” method
- primarily for policies on 0/100 basis
- difference between product charges and expenses accrue in Estate or outside WP fund
Describe shadow fund method for UWP AS calculations
- 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
Describe base asset share
- base asset share excludes allocation of miscellaneous profits and deductions of charges
Outline 3 uses of base asset shares
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
Describe the requirements for asset share documentation
- 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
Describe 4 aspects of withprofits business that might lead to unfairness issues?
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
TCF requirements include 4 aspects affecting company’s asset share philosophy and calculation method. Outline the 4 areas.
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
