Hello there, I have a question about the cost of bonus (500) and the 10% transfer from the WP fund to the NP fund. The question says that this transfer isn't allowed for in the asset figures quoted (50k and 45k). In the solvency ratio part of the solution it says that: assets = assets in WP fund + assets in NP fund = 45,000 + 50,000 = 90,000 But should it not be: assets = assets in WP fund + assets in NP fund = (45,000 - 10%*500) + (50,000 + 10%*500) I appreciate that this makes no difference to the asset value (90,000) calculated but I just want to be sure I'm not missing anything. As it is presented in the solution, when we calculate the EV as: EV = PVFP + NA + Transfer = 21,000 + 5,000 + 50 It seems like the 50 is allowed for somewhere but there's not an equal and opposite allowance elsewhere - i.e., it's made from 'thin-air'. Thanks, Matt
Hi Matthew For the solvency ratio part, as long as we have the total assets of the company correct, it doesn't matter which of the two funds those assets are in. So yes we could say we want it to be after the transfer of 10%*500 between the funds, exactly as you've done, but it's equally fine to just add the before the transfer asset figures as the solution has. Hopefully this reassures that you're not missing anything. For the EV part, we're focusing on including those assets within each fund that will ultimately belong to the shareholders. For the WP fund, the 1,000 PVFP picks up nearly all of this because of the way it is defined (in particular we don't have a separate net assets in the With-Profits Fund in this case because the PVFP has assumed that the surplus assets will be distributed as bonus over the lifetime of the policies). The only element of shareholder value from the WP fund not included in the 1,000 is the 50 transfer due at the valuation date, so we just need to add that element. We don't need an equal and opposite allowance elsewhere (as might have done if we had a WP net assets figure to 'reduce' - but that's been dealt with already in the PVFP in this case). Hope this helps Lynn
