8. Asset shares

Question 1

Asset share definition

Answer 1

Accumulation of premiums paid, rolled up with interest, less expenses and the cost of any cover.

Question 2

Asset share is the accumulation of …

Answer 2

• Premiums
• Investment income
• Misc profits

less…
* Commission and expenses
* Cost of all benefits in excess of asset share
* Tax
* Profit transfers to shareholders (not included if without profits)
* Cost of capital required to support NBS
* Contribution to undistributed surplus of the with profits ph fund required to support smoothing of bonuses and increase investment freedom (not included if without profits)

Question 3

Asset share alt definition

Answer 3

Maximum surrender value payable under any policy to prevent policy from making a loss for company

Question 4

3 major components of how asset share develops

Answer 4

• Renewal expenses
• Investment income
• Cost of life cover

Question 5

Typical asset share developments

Answer 5

• Regular premium policy - most important influence is incidence of expenses.
• Heavy initial expenses followed by lighter expenses afterwards.
• Ph ages, cost of life cover increase year by year.
• Investment income have compounding effect.
• At maturity, asset share should exceed the guaranteed sum assured - excess is profit, distributed to shareholders and/or policyholders.
• Risk for company due to initial negative asset share - if policy lapses before asset share becomes positive.

Question 6

What is the effect of surrenders on the asset share?

Answer 6

Depends:
1. If surrender value = asset share - admin costs => no effect
2. If surrender value < asset share - admin costs => profit on policy

Question 7

What is the effect of reduced market value of assets on the asset share?

Answer 7

Asset share will go down, the decrease will be offset by any reduction in the tax liability on total unrealised capital gains

Question 8

What is the effect of an increase in the shareholders’ reuired rate of return on the asset share?

Answer 8

• Cost of capital will increase&raquo_space;
  » increases sharejolders’ share of distributed profit&raquo_space;
  » inreases amount of shareholders’ transfer each year&raquo_space;
  » reduced asset share

Question 9

What is the effect of increased reserves on the asset share?

Answer 9

First order:
No effect, asset shares only affected by cashflows.

Second order:
1. Capital required to sell new policy is higher&raquo_space; larger deductions on policies at early durations&raquo_space; reduce asset share for these policies
2. Reduced investment freedom, less investment return , lower asset share