Chapter 8 - Asset Shares

Question 1

Define asset share

Answer 1

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

Question 2

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

Answer 2

• Initially, earned asset share is zero
• Each year cash flows, including premiums received and deductions made, e.g. to cover cost of benefits, are recorded
• Suitable rate of return on investments is used to accumulate asset share plus premiums less deductions (plus, for with-profits policies, allocation of any miscellaneous profits) to the year end to determine asset share
• Process is repeated for subsequent years

Question 3

List 6 deductions that may be made in determining the individual **asset share **of a contract

Answer 3

• Expenses, including any commission
• Cost of benefits (in excess of asset share) i.e. both life cover and any guarantees or options granted
• Tax (if appropriate), including any reserves made for future tax liabilities
• Transfers of profit to shareholders, in case of proprietary company
• Cost of any capital necessary to support contracts in early years
• Contribution to free assets, eg to support smoothing and greater investment flexibility