Hi, Could someone please explain the below for me ? This is the third para of the Answer to Question 5.1(i) in Q & A Part 5 Para 3 " The asset share of each policy is usually deemed to be invested pro-rate in the fund, regardless of duration in force and term to run. A variation on this method could involve increasing the fixed interest element of the fund to reflect the increase in guarantees that will take place as bonuses are declared." Thank you
The idea of an asset share is it reflects the actual assets contributed by a particular policyholder or cohort. So we should calculate the asset share according to the assets actually invested on behalf of these policyholders. The problem is that the insurer pools all the assets together rather than holding an individual account for each policyholder. Two possible options (mentioned in your query) are: 1. Assume everyone is invested in the same way, so that we allocate the same investment return to everyone. This is the pro-rata approach. For example, if the fund is invested 40% equities and 60% bonds, then we assume this split for everyone. 2. Assume that bonds are used to match guarantees. If these guarantees are a larger proportion of the asset share at later durations then assume say 40% bonds at early durations, 60% in the middle and 80% bonds at later durations. Hence if equities had outperformed bonds we would roll up the newer policies' asset shares at a higher rate than the older policies. Best wishes Mark
