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Earned Asset Share for With profits policies

J

jimmytee

Member
Hi All,

Just for clarification, do we make a deduction to the asset share when we have declared the reversionary bonuses to policyholders since it is a contractual obligation for us to pay it out in future?

Recursive formula for Asset Share:

AS_t+1 = ((AS_t + P - E_t+1)(1+i_t) - S.q_x+t)/(1- qx+t)

The S in the formula above, does it include the declared accumulated reversionary bonuses or purely the death benefits at that time?

Appreciate if anyone could assist me on this. Thanks
 
Hi

At the point in time a reversionary bonus is declared it isn't deducted from the asset share. This is because the asset share is a retrospective accumulation of cashflows. Declaring a reversionary bonus doesn't cause a cashflow.

However, as you say, declaring a reversionary bonus increases future contractual benefit payments. Therefore, in future asset share calculations the declared reversionary bonus will affect the asset share, eg in higher deductions for the cost of higher death benefits.

Hope this helps
 
Hi Lynn,

Thanks for the reply. One more question on this, say, if at time 3 (just random choose), we have declared a reversionary bonus of 40 at that time.

at time 4, when we need to calculate the asset share, do we take into account of this deduction.

So in formula:

Death benefits = 10,000
Premium= 3000
Expenses =500
Investment return = 12.6%
mortality= 0.0014

AS_4 = [(AS_3+3000-500)(1+0.126)-(10000+40)*0.0014]/(1-0.0014)

Correct me if I am wrong.

Thanks alot.
 
Hi again

Yes, your formula looks ok to me, ie yes the RB would be added to the basic sum assured.

If any terminal bonus was payable on death, then it would be usual to add this too so that the death benefit used in the formula was the total payable one death (SA + RB + TB)

Cheers :)
Lynn
 
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