Alright. BEL= asset share + CoG. CoG reflects the guarantees which asset share may not cover. Hence, for claims in excess of asset share, will we not utilize CoG first and then if the claim is > AS+CoG, deduct excess from asset share of remaining policyholders?
We have considered the scenario where claim = asset share. Hence CoG is entirely released and I suppose will be treated similar to release of reserve (Added to profit). I understood this part. Claim> asset share case is still not fully clear. Please help.
The
actual money that has been accumulated in respect of the policy is the asset share. If the company pays out more than the asset share on claim, it has lost an amount of money equal to 'claim minus asset share'. Who pays that amount? The estate or the WP policyholders? Each WP p/h would normally contribute towards that amount on a regular basis, through deduction of a 'cost of life cover' amount from their asset share each period. You may remember this from SP2 as being broadly equal to the mortality rate qx multiplied by {death benefit minus asset share}. By deducting this cost, the company is collecting a sufficient amount across all WP policies to meet the expected excess death benefits payable over asset share during each period. If there are more deaths than expected, the amount deducted could be increased (eg by using a higher value of qx to reflect the actual higher experience) - this is basically the pooling or sharing of mortality surplus (or deficit in this case) between WP p/hs. Alternatively, the WP p/hs could continue to be charged using a notional qx and the excess death claims could be 'met from the estate'.
Yes, there would be a release of some of the BEL in the Solvency II balance sheet to the extent that BEL > death claim for each additional death - but this is just about reporting, it's not about actual money.
The 'CoG' set aside for each individual policy is not money that has been taken from that policyholder. It is just
part of a figure (the BEL) in the supervisory returns which indicates how much of the {excess of assets over asset shares in the WP fund} is notionally ring-fenced as an estimate of what the guarantees under that policy would cost to hedge on a market-consistent basis. It aims to reassure the supervisor that guarantees could be met (or, at least, hedged out).
Of course the company could also be taking charges from asset shares to cover the cost of guarantees. These will mainly reflect the inherent maturity guarantee and the cost of any guaranteed annuity options. So yes, in theory the company could take this into consideration when determining the cost of life cover deduction from asset share - but that introduces an unnecessary level of complexity into the calculation. And the idea is normally that these amounts taken from each asset share can accumulate and then be used to support the cost of such guarantees when they bite. When a p/h dies, the accumulated 'cost of guarantee charges' taken from their asset share will contribute towards the cost of meeting maturity guarantees from those that remain.
I can see that there is potential for overlap between 'cost of life cover' deductions and 'cost of guarantees' deductions from asset shares, so perhaps they could be combined in some way (depending on the exact nature of the defined death benefits) - although this hasn't traditionally been how they have been treated. Keeping the 'cost of life cover' separate allows companies to better monitor and manage the distribution of (just the) mortality surplus arising. Companies would, in any case, make sure that they were not double charging. And bear in mind that these deductions are only going to be fairly broadbrush, particularly any 'cost of guarantees' deduction. The insurer wants to make sure that it is making sensible asset share deductions: ones that are broadly going to meet the additional costs in excess of asset share, and that are being taken equitably from the WP p/hs.
So yes I can see what you are getting at, but in reality a simpler approach tends to be taken to mortality surplus distribution: the amount deducted from asset shares to contribute towards the cost of life cover is qx multiplied by {death benefit minus asset share}.
