Chapter 8: Asset shares

Question 1

The asset share of a policy: (9)

Answer 1

The asset share of a policy is the accumulation of

1. premiums,
2. investment income, and
3. miscellaneous profits

less

4. commission and expenses,
5. cost of all benefits in excess of asset share,
6. tax (tax on investment including any reserves made for future tax liabilities)
7. profit transfers to shareholders
8. cost of capital required to support new business strain, and
9. contribution to the undistributed surplus of the with-profits policyholder fund required to support smoothing of bonuses and increase investment freedom.

Question 2

The asset share in relation to surrender value:

Answer 2

The asset share is the maximum surrender value payable under any policy in order to prevent the policy from causing a loss to the company.

Question 3

Different uses for an asset share in the management of a life insurance company: (6)

Answer 3

1. Bonus declarations - assists in deciding on the size of the terminal bonuses and sustainability of reversionary bonuses.
2. Monitor fairness - The asset share relative to the benefit due could be used to monitor fairness across tranches of business and policies.
3. Surrender values - On average, the benefit on surrender should not exceed the accrued asset share.
4. Market Value Adjustment Factor - The asset share compared to the smoothed benefit gives an indication of any market value adjustment factor that may be required.
5. Policy alterations - On average the value of the benefit after alteration should not exceed the accrued asset share.
6. Profit distribution - Gives indication of surplus arising, which can then be share between policyholder and shareholders.

Question 4

Different uses for an asset share in the management of a life insurance company: (6)

Answer 4

1. Bonus declarations - assists in deciding on the size of the terminal bonuses and sustainability of reversionary bonuses.
2. Monitor fairness - The asset share relative to the benefit due could be used to monitor fairness across tranches of business and policies.
3. Surrender values - On average, the benefit on surrender should not exceed the accrued asset share
4. Market Value Adjustment Factor - The asset share compared to the smoothed benefit (under a unitized with profit contract) gives an indication of any market value adjustment factor that may be required.
5. Policy alterations - On average the value of the benefit after alteration should not exceed the accrued asset share.
6. Profit distribution - gives an indication of surplus arising, which can then be shared between policyholders and shareholders.