Hi On page 11 of chapter 19, it mentioned that benefit of derivatives should not be double counted. I'm confused about the example provided re put option to protect WPF, so should we base bonuses on the full value of the assets including derivatives or not? Thanks for your help.
It depends on how the derivatives have been bought. The derivatives could have been bought by assets within the asset share, the free estate, or the shareholder funds. In the ActEd example on page 11, we have assumed that the derivatives were bought from assets within the asset share. Therefore they should be treated like any other asset. The change in the value of the derivatives should be added to the asset share over time. As bonuses depend on the asset share then we should base bonuses on the full value of assets including derivatives. If the derivatives have been bought with assets outside the asset share (eg free estate or shareholder funds) then they do not belong to the policyholders and we should not use the value of the derivatives when calculating bonuses. Best wishes Mark
