Chapter 8

Question 1

AS is used for…

Answer 1

With-profits and without-profits contracts

Question 2

AS is evaluated for …

Answer 2

Individual policies and a block of policies issued with similar conditions

Question 3

The earned AS is the …

Answer 3

Accumulation of:
* Premiums
* Investment income
* Miscellaneous profits

Less: (BCC PET)
* Benefit cost in excess of AS
* Cost of capital required to support NB strain
* Contribution to undistributed surplus of with-profits PH fund required to support smoothing of bonuses and increase in investment freedom

• Profit transfers to shareholders
• Expenses (initial & renewal)
• Tax on investment income + reserves made for future liabilities

Question 4

Describe the process of calculating the AS at time t+1 for an individual policyholder from a block of business.

Answer 4

• The AS at time t+1 for the block of business is defined as the accumulation of the AS at time t + Premium received less expenses, minus the number of policies in force at the start of year t multiplied by the sum assured and the probability of dying in year t
• Individual AS at time t+1 is the above equation divided by the number of policies in force at the start of year t multiplied by the probability of surviving to t+1 (can rearrange this to see that the DSAR for an individual policy is the sum assured - the asset share at the start of the year)
• To allow for withdrawals, take the individual AS at time t+1 and subtract the AS at time t+1 multiplied by die surrender penalty and the probability of withdrawal. Divide this quantity by the probability of surviving to t+1

Question 5

Initially the AS is …

Answer 5

ZERO.

Question 6

What will influence the movement of the AS after inception?

Answer 6

• Premium (+)
• Investment income (+)
• Renewal expenses (-)
• Cost of life cover (-)

Question 7

Describe the typical AS developments for a regular premium policy.

Answer 7

• Heavy initial expenses
• Cost of life cover increases as the policyholder ages - investment income has a compounding effect
• At maturity you expect the AS > S
• Negative AS at early duration = big problem for LIC because of risk of policy lapsing before AS > 0

Question 8

What is the relationship between the AS and the SV?

Answer 8

The AS is the max SV payable under a policy to prevent policy from making a loss.
Ensure SV < AS, otherwise exposed to withdrawal risk

Question 9

AS is a key tool in …

Answer 9

determination of with-profits bonus rates.

Question 10

For __________ or __________ the __________ will be ___________ than for ___________ or ___________

Answer 10

• Larger policies
• Shorter terms
• Period of negative AS
• Shorter
• Smaller
• Longer

Question 11

What historic information will be required for AS calculations?

Answer 11

Historic information on:
* Mortality experience
* Expenses
* Investment returns
* Withdrawal experience