Hi, This question requires analysis of change in estate. Estate = Assets - BEL = Assets - (AS + NTVOG) In the solution we are considering change in NTVOG but not the change in AS. I think I am missing something basic here, any help will be great Secondly we are adding investment income of the NTVOG and we are also adding change in NTVOG, isn’t it double counting? I believe the approach I am using is not adding up. Thanks,
I think I got it change in the AS is implicit in the line of items. Such as change due to deaath benefit is 200 in total Change in estate = assets - AS - NTVOG = 200 - 125 ( belong to AS) - 0 = 75 still have a doubt on investment income of NTVOG double counting
Hi Taking first your points about the change in asset share: bear in mind that most of the changes in asset shares (ie those that are either due to cashflows relating to the with-profits policies or due to investment return earned on the asset shares) will be exactly offset by changes in assets. So for the purposes of understanding the change in estate, we only need to consider those items where there will not be a direct offset between assets and asset shares, eg due to smoothing and death surplus (both of which are charged to the estate, not to asset shares) - as are listed explicitly as components of the analysis. In terms of the NTVOG, bear in mind that we would expect the NTVOG to increase over the period due to the 'unwinding' of the discount rate used to determine that liability. This is comparable with the investment income earned on the assets backing the NTVOG. We don't know exactly what discount rate was used, but if it was 1% pa (ie the same as the actual return earned) then we would expect the NTVOG to increase by 1% over the period, ie (all else being equal) we would expect it to increase to 10,100 at the end of the year. But it is actually 8,000 at that time and so there has been a 'release' into the estate of a total of 2,100. This is shown in the analysis as the sum of the 100 investment income and the 2,000 difference. If instead the discount rate used was 0.5% pa, then we would expect the NTVOG to be 10,050 at the end of the year, thus giving us a 'release' into the estate of a total of 2,050 ... but we have also earned an investment surplus of 500 (the extra 0.5% earned in excess of what was 'expected' in the liability valuation) - and hence again there is a 2,100 difference. How this total of 2,100 is presented isn't particularly important, but given the lack of information we have here it would seem that splitting it into the 100 and 2,000 seems most appropriate - as these are the figures actually provided in the question. Hope that helps Lindsay
