Asset shares - unit linked

The asset share of a unit linked policy is no different to any other policy, so expenses are deducted and changes don't come into it. It's basically the unit fund plus the non-unit fund since charges are transfers between the two. The relationship between the asset share and unit fund mainly depends on how well the charges match the expenses and cost of benefits.

 

This doesn't sound right I'm afraid - I think you are muddling up unit-linked and unitised with-profits. The relationship between the unit fund and the asset share is complex in these two cases. It might help if I give a few examples.

We can calculate an asset share for any policy (including unit-linked, unitised with-profits, conventional non-linked contracts). In all cases a basic asset share is the actual premiums less expenses and cost of claims accumulated at the actual investment return.

The asset share can be negative as you suggest. In this case the surrender value may be very low (or zero). If the unit-linked fund is positive then we might deduct a surrender penalty. The unit-linked fund could be negative (for example late in the policy term if mortality charges have been high and investment return has been low). However, the surrender value cannot be negative, so the insurer would make a loss.

We wouldn't apply penalties on death. So the death benefit can be higher than the asset share. The excess of the death benefit over the asset share would represent the cost of the benefits that would be shared by the surviving policyholders' asset share.

Unit-linked asset shares might be similar to the unit fund. The unit fund is the accumulated premiums less charges. Compare this with the asset share, which is the accumulated premiums less expenses less cost of claims. So the two will be the same if the charges exactly match the expenses and cost of claims.

Unitised with-profits (UWP, also known as accumulating with-profits) asset shares are unlikely to be similar to the unit fund. The asset share is accumulated with the actual investment return (which could be positive or negative). The unit fund is accumulated with bonuses (which cannot be negative). Normally we'd expect the asset share to be bigger than the UWP unit fund, as regular bonuses will on average be smaller than the investment return, so that a terminal bonus can be built up. However, the asset share might be smaller than the unit fund (eg if the stock market crashes), and then we would impose a market value reduction on early surrender so that the policyholder did not receive more than their asset share.

I hope this helps, but do let me know if you have further questions.

Mark

 

Yes, that makes a bit more sense as unit-linked policies don't have any bonuses.

The comments above still apply, but here are a few more points on UWP.

The UWP asset share isn't the unit fund plus the value of the guarantees. Many companies would ignore the value of the guarantees when calculating a basic asset share. Other companies deduct the cost of the guarantees from the asset share (this is rather like the policyholder paying a charge to receive the guarantee).

The asset share is what the policyholder has contributed. On the other hand, the reserve is what we need to hold and this would certainly include an addition for the value of the guarantees.

The size of the non-unit fund isn't particularly relevant to death and surrender payouts. It is the asset share that tells us what surrender payouts should be.

Best wishes

Mark

 

Hi

As is described in Section 3.5 of Chapter 6, a policyholder's UWP unit fund (UF) (which is what the policyholder gets to see) increases in value by the regular bonus (RB) rate only, either by increasing the unit price by the bonus rate (possibly on a daily basis) or by keeping the unit price the same and allocating additional bonus units.

The asset share (AS) is the actual accumulation of assets underlying the policy. Hence it should increase in value by the actual investment return.

Therefore, all else being equal, we would have AS > UF if actual investment return > RB, and AS < UF if actual investment return < RB.

It is more likely that actual investment return > RB, because much of the actual investment return is being held back to be distributed as terminal bonus (TB) instead.

However, it could be the case that actual investment return < RB, eg if there has been an equity market crash.

Does that help to shed light?

 

Apologies - I'm not sure what you mean by 'unit-linked with profit business'? That sounds as if it is the same thing as unitised with-profits business - and the latter is what it would more appropriately be called.

Did you mean to ask about the non-unitised version of accumulating with-profits? In that case, you wouldn't have a 'unit fund'.

 

Asset shares represent the actual assets accrued in respect of each policy: premiums received less expenses incurred, accumulated with actual investment return (and with other miscellaneous additions / deductions as described in the course).

Bonuses are added to the amount of benefit that the policyholder will receive on claim. They don't represent cashflows that have actually happened and so are not added to asset shares.

[A bonus would directly impact asset shares if it were paid out as cash, eg a dividend payment under the contribution method. In that case, we have had an actual cashflow out of the company, so the actual amount of assets held goes down and hence the asset share would go down.]

 

That's broadly correct, in that bonuses actually paid out as cash are deducted from asset shares.

Be a little bit careful about referring to RB as being 'bonuses held back', as the additions of RB are made regularly throughout the policy term. However, if they are simply added to the underlying benefit which has not yet been paid out, then the asset share is not directly impacted.

There can, however, be secondary impacts on asset shares: RB declarations might trigger a shareholder transfer (depending on how the latter are defined), which would be deducted from asset share. And the cost of life cover might change as a result of an RB declaration.