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Surrender Values: Asset share and interest rates

A

ActuarialKropotkin

Member
In the chapter on Surrender Values there is a part where four situations are given and the impacts on the asset share and realistic prospective reserve are explained. For Situation 1 it is stated that:

"Interest rates rise suddenly late on in the term of a without-profits endowment. Matched asset share drops. However, realistic prospective value on new higher best estimate interest rates also drops by enough to retain same profit. (Unchanged) value on original premium basis now unsuitable."

I have two questions:
1. What is a "matched" asset share?
2. Why does the matched asset share drop?

I do understand the impact of an increasing interest rate on the prospective value, because the present value of the liabilities will decrease as the expected interest rate increases, but I do not understand why the asset share would drop. What is the difference between earned asset share and "matched" asset share?

Thanks.
 
ActuarialKropotkin said:
In the chapter on Surrender Values there is a part where four situations are given and the impacts on the asset share and realistic prospective reserve are explained. For Situation 1 it is stated that:

"Interest rates rise suddenly late on in the term of a without-profits endowment. Matched asset share drops. However, realistic prospective value on new higher best estimate interest rates also drops by enough to retain same profit. (Unchanged) value on original premium basis now unsuitable."

I have two questions:
1. What is a "matched" asset share?
2. Why does the matched asset share drop?

I do understand the impact of an increasing interest rate on the prospective value, because the present value of the liabilities will decrease as the expected interest rate increases, but I do not understand why the asset share would drop. What is the difference between earned asset share and "matched" asset share?

Thanks.
Click to expand...
Hi

By matched asset share we just mean that the asset share is invested in assets that match the liabilities.

A higher interest rate means that we discount the asset cashflows at a higher rate of interest, so their value drops.

Best wishes

Mark
 
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