September 2014

[1495_sc]

Hello- Few questions which I need help with are as follows. Look forward to hearing from someone who can clarify my doubts.

Question 1

1. Part iii) The solution does not consider revalorisation method and contribution method for distributing surplus. Is there any rule of thumb for the relevant bonus distribution method which we should have for different product types (annuity, unit linked, endowment, term and whole life mostly)? For example- addition to benefit for regular whole life product. Could not find anything in core reading which can be a useful tip while writing exam.

Question 2

1. in the context of SA2, what does unrelieved expense mean? For example, the reference in solution of Q2 part iii.

2. In the same solution, there is a possibility of company Y weakening its valuation basis after transferring business from company X. Why would this happen? This is one of the reasons in core reading for reaching excess E position but what is the relevance in the context of Y transferring business from X?

3. We assume a company to be excess E if the minimum profit test bites but I did not follow this correlation. Is there a simple explanation to this?

Thank you in advance!

 

[Em Francis]

Hello- Few questions which I need help with are as follows. Look forward to hearing from someone who can clarify my doubts.

Question 1

1. Part iii) The solution does not consider revalorisation method and contribution method for distributing surplus. Is there any rule of thumb for the relevant bonus distribution method which we should have for different product types (annuity, unit linked, endowment, term and whole life mostly)? For example- addition to benefit for regular whole life product. Could not find anything in core reading which can be a useful tip while writing exam.

Hi
The question was written when the SA2 syllabus was UK-specific so would have only considered the 'additions to benefit' method. If a such a question was asked now, then you would likely be told which method is used.

Question 2

1. in the context of SA2, what does unrelieved expense mean? For example, the reference in solution of Q2 part iii.

This is referring to the company being XSE as its expenses (E ) (due to high initial expenses incurred on newly written business) would likely result in the minimum test biting (so that the amount of E that can net down income (I ) is reduced) or that E is greater than I. Both will result in unrelieved expenses.

2. In the same solution, there is a possibility of company Y weakening its valuation basis after transferring business from company X. Why would this happen? This is one of the reasons in core reading for reaching excess E position but what is the relevance in the context of Y transferring business from X?

There is no specific reason why but it is a possibility and a reason why company Y has switched tax position. This could be because the overall business is less risky or that it has better data to base its assumptions on.

3. We assume a company to be excess E if the minimum profit test bites but I did not follow this correlation. Is there a simple explanation to this?

Thank you in advance!

As explained above, if the minimum test bites than E or/and I have to be adjusted to make it equal to the minimum profit. This adjustment makes the company excess E.

Hope this all now makes sense.

Thanks
Em

 

[1495_sc]

Thank you, this was very helpful. Just one clarification; what is unrelieved expense generally?

 

[Em Francis]

Thank you, this was very helpful. Just one clarification; what is unrelieved expense generally?

Hi
I am not sure exactly what you mean by 'generally' but you could think of them as expenses which have been restricted in netting down income.
Hope that helps.
Thanks
Em

 

[1495_sc]

Alright. Is this the same as Core Reading in page 245 of 2022 version? When the minimum profits test bites, 'the E of the following period is increased by the amount of income item included in the current year to satisfy minimum profits test.' The E here= unrelieved expense.

 

[Em Francis]

Alright. Is this the same as Core Reading in page 245 of 2022 version? When the minimum profits test bites, 'the E of the following period is increased by the amount of income item included in the current year to satisfy minimum profits test.' The E here= unrelieved expense.

Yes