Below comes from ASSET solutions which I totally don't get... Can someone please help? Thank you. "The aggregate assets will reflect the actual with-profits maturity benefits paid. The maturity benefit may be different from the asset share due to guarantees or smoothing, but the asset share of the remaining policies are unlikely to have been adjusted for this."
Here’s my reasoning but I don’t think it’s perfect, so take it with a pinch of salt. The question is basically about doing an approximative calculation of asset share using ready financial data. Visualising a balance sheet diagram helps here. At maturity the theoretical amount to pay for the entire WP block is the asset share. Since the entire WP block is backed by assets, the assets would be a suitable proxy for this theoretical value. Asset values are asset values and these can't be adjusted for cost of guarantees, smoothing like done on the liabilities side. To get the final theoretical asset share to pay on maturity or surrender or claim the cost of guarantees, smoothing has to be applied. But in reality only some policies are maturing,surrendered,claimed for whilst the rest are still inforce. So it's difficult to apportion 'asset values' between terminated policies and those that remain inforce.
Thank you for the explanations, calibre2001. The solutions said "aggregate assets will reflect the actual wp maturity benefits paid", I did not understand this as the question said aggragate assets were backing WPBR so i assumed assets would asset shares, not maturity payouts? Any further explanations are appreciated. Thanks.
Please note I am interpreting directly from your text so I may go completely out of context (haven't see the actual Question or ASET soln): Lets first replace "reflect" in the original quote with "allow for" to see if the quote would sound any better? "The aggregate assets will "allow for" the actual with-profits maturity benefits paid. The maturity benefit may be different from the asset share due to guarantees or smoothing, but the asset share of the remaining policies are unlikely to have been adjusted for this." If revised quote sounds better, then I would add that; Maturity payments are "actual" cashflows whilst asset share is a "concept" - so though assets are backing WPBR, the future market value of these assets as at any point will reflect (I now use the original word) "actual" cashflows rather than asset shares which may not match the maturity payout (due to smoothing, Guarantees etc as per your text). From here on it will be threading towards analysis of movement in working capital. Hope its useful and apologies if I am out of context. Regards
Thank you dok87 the revised quote does sound better! The question has been answered, many thanks guys for helping!
