Can someone please help me understand paragraph 2 of the solution. Why is it not necessary to consider the nav part? Surely if the assets have increased in value the ev will increase? Also could someone please explain transfers between the SF and the LTF generally? What causes the transfers each way and how do they affect the EV? Thanks
Yes, you're right - an increase in NAV will increase the EV. The ER is making the point that investment returns on NAV aren't really to do with the progress of the life insurance business. I don't think it's a point worth making today, as any analysis of change in EV will certainly include this aspect (although if we're analysing the change in EV for one particular LTF, then investment returns on NAV within the SHF would be excluded). The directors will transfer capital from the SHF to a LTF if it's needed to cover liabilities, to support new business, to provide investment freedom, to provide the ability to smooth bonuses etc. If a 0/100 fund contains more capital than is needed for this purpose, then it can be transferred back to the SHF. In a 90/10 fund, 1/9th of the cost of all bonus declarations can be transferred across to the SHF.
