WP Management - Asset Shares

Question 1

What are the main uses of asset shares? (7)

Answer 1

1. maturity/surrender values
2. TCF showing
3. mvr
4. level of RB
5. smoothing maturity values
6. determining wpbr in RBS but also FPRL as used for payouts
7. base asset share used as guide to meet PRE

Question 2

What is a general formula for asset shares?

Answer 2

premiums
- deductions (expenses+commission+cost of providing guarantees and options and life cover + SHT + cost of capital + charge for smoothing/g’s/o’s)
+ allocated misc profits (Surrender profit+non-par profit+tax gains)
- tax
+ enhancements from estate

Note misc profits may be +ve or -ve

Question 3

How is profit from the difference between maturity payouts and asset share handled?

Answer 3

it’s distributed to the estate, a loss is taken from the estate (it’s smoothing)

Question 4

How is investment return handled in the asset share?

Answer 4

Everything is increase by appropriate investment return

Question 5

What does the EBR depend on?

Answer 5

solvency of fund

level of guarantees

Question 6

what are the 5 methods of calculating investment return on asset share?

Answer 6

1. return on assets notionally allocated to business or specific product lines within the wp business
2. notional returns with notional asset mix and returns on indices
3. overall return on non-linked assets in fund
4. combination of above
5. managed fund approach - each policy invested pro-rata in fund that backs the with-profits business (used most)

Question 7

Surrender profits - how are they calculated/allocated/methods of allocation

Answer 7

Calculated as target % of asset share
Allocate as increase to AS or inherited estate

Method 1:
Accumulate asset shares allowing for surrender profits on the cohort
Method 2:
Increase the investment return to reflect the surrender profits therefore spreading over wider range of policies/products

Question 8

How are non-part profits allocation to with-profits?

Answer 8

% addition to asset shares or explicit addition to assumed investment return

Question 9

How might you split past expenses to be charged in deductions to asset share?

Answer 9

acquisition//renewal/investment

Question 10

What does DAC do?

Answer 10

Allow deferral of tax relief on acquisition expenses spread over 7 years

Question 11

How are shareholder transfers usually calculated? Where are these deductions made?

Answer 11

90/10 basis.
usually 1/9th of cost of bonus on supervisory valuation basis (not 1/10th!)
Deductions are made from the asset share
ie. pay out bonus of 90, then take 10 from asset share

Question 12

What guarantees might you make charges to asset share for?

Answer 12

cost of providing gtees
cost of smoothing
cost of building up capital base
cost of providing appropriate return on capital writing contract

Question 13

What are the 3 mthods to calculate asset shares for unitised wp? give 1 line on each

Answer 13

Retro accumulation using actual expenses - actual expenses deducted from AS (like CWP) rather than charges loaded to premiums
Retro accumulation using product charges - usually in a 0:100 fund
Shadow fund - instead of accumulating AS at bonus rates, it uses actual investment return earned on assets, easier to apply than others

Question 14

What is base asset share and why would it be used?

Answer 14

The asset share without misc profits and deductions for charges on guarantees/smoothing/CoC
Used to find companies reliance on misc profits (unpredictable in future or non-existent) by AS-Base AS

Question 15

Where would the company philosophy and method of AS calculation be found?

Answer 15

Documentation:
Within company
Promotional material
PPFM
CFPPFM

Question 16

What parts of TCF should be thought about when coming up with AS method/philosophy?

Answer 16

1. Charges to WP funds
2. Basis on writing NB
3. SV approach to be in interests of remaining/departing policyholders
4. Target ranges specified in PPFM of payouts