The solution says "The 1% of unit reserves will move in line with market movements which would not suitably reflect the risks to the company e.g. low capital requirements when the unit fund is low". Please explain. Also why is capital required to be held for unit reserves when unit reserves are paid out at the time of claim?
I think you have answered your own question. The capital requirements will go up when the unit fund rises, but the risk has not gone up.
Can I clarify my understanding of EV calculation for with-profits business in part (ii). Is there a conflict between PV of future shareholder profits (after tax), i.e. 1000 and the shareholder transfer 10% * 500? My understanding is that 1000 should be the accumulation of all future profits (i.e. 10% of all future bonuses) that are entitled to shareholders, which should also include the 10% * 500. Or the 1000 is meant to exclude the declared bonuses? From the name of 'shareholder transfer', I thought the amount of money would be transferred from with-profits fund to retained earnings under shareholder's equity, but in this question it transfers from WP fund to NP fund. Does this happen in the real business? In this case, the 10% * 500 is prior to the tax, but 1000 is post tax, which seems inconsistent in EV calculation?
Hi Damien The question states that: "The present value of future shareholder profits for the With-Profits Fund allows for an assumed level of bonus that will gradually distribute the surplus assets in that fund over the lifetime of the policies, but does not include the shareholder transfer due at the valuation date." So the 1000 does not include the shareholder transfer of 50 due now in this case. Yes, it is very common for a shareholder transfer to be made out of the with-profits fund to the without-profits fund (or a shareholder fund) when a bonus is declared. I agree that the question isn't very clear about what's going on with tax. However, we are given no information to make further adjustments so there is nothing more to do in the SP2 exam. Best wishes Mark
