Sept 2006 Qu6 (ii)

[craufujy]

Hi

Can anyone explain why it is we have to take into account the purpose of calculating the AS and the the profit distn method and philosophy when assessing the investment return used in the AS calc?

I don't understand from the solutions why these issues affect the investment return figure. I would have thought that you would just have to take into account the return achieved from the actual assets that have been invested in and the tax considerations of these assets....?

 

[Lynn Birchall]

Hi

In many ways you're right - we do take the actual returns from the actual assets that have been invested in.

The difficulty is then the common exam problem of making one main idea last for enough marks

So, if we think about how we'd get our "actual returns" in practice, we'd have the issue, for example, of whether we should use the same return for all policies (the return on the with-profits assets as a whole) or a different figure for every single policy (reflecting returns for its individual assets) or something in between.

This is related to the profit distribution method and philosophy as the different methods would suggest different answers to this question (for example the contribution method typically uses smaller groups, so more different return figures, than the additions to benefit method).

The bonus method and the use to which we were going to put the answer might also affect whether the investment return figure we put into the calculation should be unsmoothed or smoothed.

Hope this helps
Lynn