April 2019 Q2 (iii)

[AaronD]

Hi,

I'm looking at the ASET for April 2019 Q2 (iii). I'm trying to understand how the movements for Death claims and Maturities are calculated.

For Death Claims, the movement = -125 = -200/1.6 (I can see that Death claims are 60% higher and the excess is charged to the estate but I can't understand why we divide by 1.6?

For Maturities, the movement = -10,582 = -10,000/(0.9 * 1.05) (I can see that Maturities = 10,000 and Maturities are based on smoothed AS (which is approx 90% of AS) and inncreased by 5% to allow for distribution to estate.

This is a silly q, but I'm unsure why we are dividing the 1.6 and (0.9*1.05) factors.

Many thanks,
Aaron

 

[Mark Willder]

Hi,

I'm looking at the ASET for April 2019 Q2 (iii). I'm trying to understand how the movements for Death claims and Maturities are calculated.

For Death Claims, the movement = -125 = -200/1.6 (I can see that Death claims are 60% higher and the excess is charged to the estate but I can't understand why we divide by 1.6?

For Maturities, the movement = -10,582 = -10,000/(0.9 * 1.05) (I can see that Maturities = 10,000 and Maturities are based on smoothed AS (which is approx 90% of AS) and inncreased by 5% to allow for distribution to estate.

This is a silly q, but I'm unsure why we are dividing the 1.6 and (0.9*1.05) factors.

Many thanks,
Aaron

Hi Aaron

The question says that:

"Death claims were on average 60% higher than asset shares, and the excess was charged to the estate."

So we need to split the death claims of 200 between charges to the asset share and charges to the estate. We only deduct 125 from the asset share for death claims as the excess 75 (=125x0.6) is charged to the estate.

The question says that:

"Smoothed asset shares were approximately 90% of asset shares.

Maturity claims were based on smoothed asset shares, increased by 5% to allow for some distribution of the estate."

We know that maturity payouts were 10,000, so if payouts were exactly equal to asset share, then the asset share would have gone down by 10,000 as well. But from the information above we see that payouts were equal to 0.9 x 1.05 x asset shares (as payouts were reduced by the smoothing and increased by the estate distribution.) Putting this together we have

Payout = 10,000 = Asset Share x 0.9 x 1.05
Rearranging gives

Asset share = 10,000 / 0.9 / 1.05 = 10,582

So the asset shares of the maturing policies were 10,582.

Best wishes

Mark

 

[GeorgeFS]

Hi,

I'm struggling a bit with the first point here where we are splitting out the death claims between charges to asset share and charges to the estate.

I'm also finding the wording "Death claims were on average 60% higher than asset shares" a little confusing, what does this actually mean?

Say if asset shares were 1,000, this would mean death claims were 1,600. Does this then mean that a full 1,000 would be charged to the asset share, and the remainder of 600 charged to the estate. But in this instance would that not mean asset share is reduced to zero?

There's probably some knowledge gap here that I'm not grasping, but any help would be great. Thanks.

 

[Em Francis]

Hi,

I'm struggling a bit with the first point here where we are splitting out the death claims between charges to asset share and charges to the estate.

I'm also finding the wording "Death claims were on average 60% higher than asset shares" a little confusing, what does this actually mean?

Say if asset shares were 1,000, this would mean death claims were 1,600. Does this then mean that a full 1,000 would be charged to the asset share, and the remainder of 600 charged to the estate. But in this instance would that not mean asset share is reduced to zero?

There's probably some knowledge gap here that I'm not grasping, but any help would be great. Thanks.

Hi

You would calculate the death charge, ie total death claim amount over the total asset shares of those who have died over the period. This resulted in total claims being 60% higher than total asset shares. Yes, you are right for those who have died, their asset shares would be paid out (so zero asset share left) but then there would be a charge of 200-(200/1.6) to the estate to cover the excess. An alternative approach would be to average this excess across remaining policies and charge their asset share.