5 Quick Doubts - Asset Share and Surplus Distribution

[Kamal Sardana]

Hi Team, my doubts are as follows:

Q.1 What is the difference between Undistributed Surplus and Estate ? Are they both same thing ?

Q.2 Is Estate a part of Asset Shares or not ?

Q.3 Difference between "with-profits fund asset" and "asset shares of in-force business" ? [You can refer Page 16 of Ch 20(SA2-2022): RB could be said to be sustainable if the company could continue to pay current levels of RB:
by using up all its with-profits fund assets and giving no terminal bonus
by using only the asset shares of in-force business and giving no terminal bonus
by using the asset shares of in-force business and maintaining its target percentage of terminal bonus.]

Q.4 Tax Deductions in Asset Share Chapter: Page 10 of Chapter 19.(SA2-2022):
I am not able to this paragraph at all such as:
1. What is Net of Tax expenses?
2. What is Net of tax Investment return? and everything mentioned below!!
"For business taxed on an I-E basis, most companies use net of tax expenses and a net of tax investment return. A possible alternative would be to treat each policy on a stand-alone basis using gross income and gross expenses until income exceeds expenses. After that, net would be used. Allowance might be made for deferral of tax relief on acquisition expenses being spread over seven years. The stand-alone basis assumes that the policy’s expenses won’t attract tax relief until its own investment income exceeds its expenses. However, if the company has sufficient ‘I’ generated elsewhere, then in fact the company will receive tax relief on expenses immediately. If this isn’t credited to individual policy asset shares then it will accrue to the estate within the fund."

Q.5 based on Ques 4 above, I am not able to understand the question i.e. Practice Question - Q19.3 (SA2-2022):
A UK life insurance company is calculating the asset share of a 25-year with-profits endowment assurance policy. It is considering the following three different approaches to allowing for tax:
 Gross i.e. ignore tax
 Net i.e. net down ‘I’ and ‘E’ throughout the term
 Stand-alone i.e. switch from gross to net when ‘I’ exceeds ‘E’.
Compare the value of the policy’s asset share using these approaches, considering separately the value of the asset share early on, mid term and later on.

 

[Kamal Sardana]

Looking forward to a response............

 

[Em Francis]

Hi Team, my doubts are as follows:

Q.1 What is the difference between Undistributed Surplus and Estate ? Are they both same thing ?

Hi

They could be, it will depend on how the estate is defined. The inherited estate is often defined as the excess of realistic assets over realistic liabilities within the with-profits fund which is effectively ‘surplus’. However, some of the estate may be earmarked for future distribution; if this is the case then you would need to be careful as ‘undistributed’ surplus may not include this earmarked estate.

Q.2 Is Estate a part of Asset Shares or not ?

No, the estate is the excess of the assets over the liabilities within the with-profits fund. The asset share make up part of these liabilities. It may help to think about assets within the fund can back the asset share, the guarantees (including smoothing) and the estate.

Q.3 Difference between "with-profits fund asset" and "asset shares of in-force business" ? [You can refer Page 16 of Ch 20(SA2-2022): RB could be said to be sustainable if the company could continue to pay current levels of RB:
by using up all its with-profits fund assets and giving no terminal bonus
by using only the asset shares of in-force business and giving no terminal bonus
by using the asset shares of in-force business and maintaining its target percentage of terminal bonus.]

As mentioned above, asset shares form the liabilities, the ‘with-profits fund assets’ are the assets of the with-profits fund.

Q.4 Tax Deductions in Asset Share Chapter: Page 10 of Chapter 19.(SA2-2022):
I am not able to this paragraph at all such as:
1. What is Net of Tax expenses?

After the deduction of tax (see my comments below).

2. What is Net of tax Investment return?

After the deduction of tax.

and everything mentioned below!!
"For business taxed on an I-E basis, most companies use net of tax expenses and a net of tax investment return. A possible alternative would be to treat each policy on a stand-alone basis using gross income and gross expenses until income exceeds expenses. After that, net would be used. Allowance might be made for deferral of tax relief on acquisition expenses being spread over seven years. The stand-alone basis assumes that the policy’s expenses won’t attract tax relief until its own investment income exceeds its expenses. However, if the company has sufficient ‘I’ generated elsewhere, then in fact the company will receive tax relief on expenses immediately. If this isn’t credited to individual policy asset shares then it will accrue to the estate within the fund."

Net of tax investment return and net of tax expenses would be used if the company was in an XSI position, ie where investment return ‘I’ is greater than expenses ‘E’ (or as mentioned in the Course notes above it has enough investment income generated elsewhere and when added to I is greater than E) and the minimum profit test does not bite.

Q.5 based on Ques 4 above, I am not able to understand the question i.e. Practice Question - Q19.3 (SA2-2022):
A UK life insurance company is calculating the asset share of a 25-year with-profits endowment assurance policy. It is considering the following three different approaches to allowing for tax:
 Gross i.e. ignore tax
 Net i.e. net down ‘I’ and ‘E’ throughout the term
 Stand-alone i.e. switch from gross to net when ‘I’ exceeds ‘E’.
Compare the value of the policy’s asset share using these approaches, considering separately the value of the asset share early on, mid term and later on.

Sorry, are you able to provide more detail on what you are not sure about in the question and I can try and help.