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

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

Answer 2

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

Question 3

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

Answer 3

+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