Chapter 8 - Asset share

Question 1

What is asset share

Answer 1

It is the accumulation of premiums paid rolled up with interest, less expenses and the cost of any cover
We usually use the experience of the policy to date, rather than any assumed basis

Question 2

What are the deductions associated with calculating the asset share

Answer 2

CUTE PC

• the COST of providing all benefits in excess of asset share (eg. life cover or other guarantees or options granted)
• a contribution to the UNDISTRIBUTED surplus in the with-profits policyholder fund which
• TAX on investment income including any reserves made for future tax liabilities
• EXPENSES incurred and commissions paid
• transfer of PROFIT to shareholders
• the costs of any CAPITAL necessary to support contracts in the early years.

Question 3

How does strengthening the reserving affect the asset share of a policy

Answer 3

At an immediate level, there will be no change because asset shares are affected only by cashflows, and the level of reserves is therefore irrelevant.

On a second-order effect:
- The strengthening of the reserving basis will mean that the capital required to sell a policy will now be higher. Larger deductions should therefore be made from asset shares at early policy durations, to pay for the increased cost of capital, for all policies that require more capital than before. This will reduce the future asset shares for such policies
- An increase in reserves will reduce the insurer’s investment freedom. This will reduce the future investment return potential, which will in turn result in lower asset shares ultimately.