9.6 Flashcards
Example 1:
Conventional regular premium w/p endowment maturing at age 65 valued using prudential basis
Mortality
Interest- gross rate using PA’s curves
Tax
If individual owns it, subject to IPF
Subject to prescribed rates (30% of taxable income + 12% on capital gains)
If necessary, allow for dividends with-holding tax
Actual income tax rate depends on proportion of income received by this fund that would be subject to tax and…
… expectation of future trends in this proportion
Future expenses, tax relief and expense inflation
Withdrawals
Future bonuses
Make implicit allowance for BSR
Example 2:
A smoothed bonus endowment assurance where
Premiums paid – less charges are used to purchase units that accumulate at a rate set each year by company.
No guaranteed maturity value
A management fee of 1.5% p.a. of the unit value is levied
Death benefit is the value of units
On surrender, a surrender penalty is applied to the units equal to the capitalised value of the future 1.5% charge.
Company has a right to impose a market value adjustment on surrenders, but to date has not done so.
The contract is to be valued using the prudential supervision reporting basis.
Need value of units at val date + projected unit acc to calc future management charges for non-unit reserves
Must project unit accounts allowing for realistic asmt of future bonus rates
Future bonus rates must be consistent with assets backing unit reserves (net of taxes and charges)
Investment return based on risk free yield curves given by PA
Tax assumptions must take into acc the long-term asset mix of unit funds and …
… split of long term expected returns on each asset class into income and capital gains
Mortality
Withdrawals
Bonus rate
Discount rate
Expenses
Take account of the actual expenses in the 12 months preceding the valuation date, …
…adjusted as necessary for actual and expected changes in the book size, …
and including an appropriate proportion of tax relief
Commission
Rate of renewal commission must be known
Inflation rate
In line with risk free yield curves provided by PA
Premium escalations
Future escalations will modelled using a realistic assessment of the expected future premium increase take-up rates at a level consistent with recent past experience modified by expected future trends and the long-term economic scenario.
Tax rate
Account for current and future expected tax basis of IPF
Other
A separate reserve equal for best estimate value of financial options and guarantees underlying policy, calculated in line with APN 110.
