CH 8 (Asset Shares)

Question 1

Positive Components of Asset Share

Answer 1

• Premiums
• Investment income
• Misc profit
  (e. g. allocation of profits on without-profits business)

Question 2

Negative Components of Asset Share

Answer 2

• Commissions and Expenses
• Cost of benefits
  (in excess of asset share)
• Tax
  (on investment income + tax liability impact on capital appreciation/gains)
• Profit transfers to shareholders (N/A to without profit contracts)
• Cost of capital
  (capital to support NBS)
• Contribution to undistributed surplus of with-profits (required to support smoothing of bonuses + increase investment freedom)

Question 3

Recursive Formula for Asset Share

Answer 3

Asset Share Now 
=
[ (Asset share a year ago + Premium - Expenses pp)
*
(1 + interest return in previous year) 
- (Death Benefit)*(Mortality Rate of past year) ]
/
[1 - (Mortality Rate of past year) ]

…multiply by n for aggregate

Question 4

Definition of Asset Share

Answer 4

• Accumulation of inflows from the policy less outflows from the policy over time
• The max surrender value payable under a policy to prevent the policy from causing a loss to the company

-Similar to gross premium retrospective reserve
(difference is not on assumed basis, but actual basis)

____________

1. Asset share is accumulation of premiums…
2. …less deductions associated with the contract…
3. …(plus, for with-profits policies, allocation of profits on without-profits business and surrender profits on with-profits business if applicable & appropriate)…
4. …all accumulated at the actual rate of return earned on investments

Question 5

Main Uses of Asset Share

Answer 5

BFS PAPA

• determination of Bonus rates
  (indication of surplus available; deciding size of terminal bonus - sustainability of reversionary bonuses)
• monitor Fairness across tranches of business/policies
  (asset share relative to benefit if discretion available)
• Surrender benefits
  (upper limit on surrender)
• Profit distribution to shareholders
• market value Adjustment
  (asset share vs smoothed benefit)
• Planning
  (project solvency + monitor profitability + impact of actual vs expected)
• policy Alterations

Question 6

Explain in words how an asset share may be calculated using a recursive formula

Answer 6

1. Asset share can be calculated recursively on year-to-year basis
2. Initially, earned asset share is zero
3. Each year cashflows, including premiums received and deductions made, e.g. to cover cost of benefits, are recorded
4. Suitable rate of return on investments is used to accumulate asset share plus premiums less deductions (plus, for with-profits policies, allocation of any miscallaneous profits) to the year end to determine asset share
5. Process is repeated for subsequent years