Hi, I had a few questions relating to asset share. i) Are asset share determined only for with profits contacts. If so, why? ii) Why reserves have no impact on asset share? iii) Asset share grows in initial years where premiums is higher than cost of providing life cover. So what exactly cost of providing life cover means? iv) What is smoothening of asset share? Any help would be appreciated. Regards, Abhishek.
Hi Abhishek With-profits policies often aim to pay out the smoothed asset share. So assets shares are particularly useful for with-profits. However, asset shares have other uses. For example we can say that the company has made a profit if the payout is less than the asset share. So an asset share might be calculated for without-profit policies to indicate the maximum amount that can be paid as a surrender value. Asset shares in their most basic form are the accumulation with investment return of the past premiums less expenses less cost of claims. These components do not include the reserves, so reserves have no impact on a simple asset share. Some companies calculate a more advanced asset share, eg they may make a deduction for the cost of capital to support the contract. In this case the size of the reserves will have some impact on the asset share as it will determine the capital required to support the contract. For example, the asset share at the start of the contract may be -5 and the initial reserve may be 10, so the insurer needs to supply capital of 15 to cover the negative asset share and set up the reserve. Life cover will have a cost if the payout on death is bigger than the asset share. In the early years of a regular premium contract the asset share will be low, so the cost of each claim will be high. However, the probability of a claim should be very low due to underwriting if the contract is sold to relatively young people. So the overall cost of the life cover should be low compared to the premium (given that the product has been priced to cover death claims and to build up a maturity value). Asset shares are often smoothed so that with-profits policyholders receive a more stable payout. There are lots of ways that companies might do this. For example, the asset share might be smoothed directly, perhaps by taking the average asset share of policies maturing in the last five years. Alternatively, the asset share could be calculated using a smoothed investment return rather than the actual investment return. Best wishes Mark
