Hi everyone. I hv 1 question about the deductions made when finding the asset share of a with-profit policy. From pg 5 ch 5, what is the difference between "transfers of profit to shareholders" and "cost of capital" deductions? I understand that both shareholders and policyholders want a return on their capital 'invested' in the policy, but why do we have 2 also deduct the transf of profit to shareholders (thought it alrdy incl in cost of capital)? Thanks a lot.
Proprietary insurance companies will have a number of different funds. The with-profits fund includes the reserves and asset shares for all the with-profits business. Typically the fund will be managed so that the assets exceed the asset shares of the current policyholders. These excess assets provide a cushion against adverse experience and also allow more investment freedom, smoothing, and can cover new business strain. This fund is often jointly owned by the shareholders and policyholders. The capital used to write with-profits business will come from the excess assets in the with-profits fund. So we deduct a charge from the asset share for the cost of this capital and add it to the excess assets of the fund. In this way we hope that the capital within the fund will grow so that more business can be written in the future. Note that the excess assets in the fund are still jointly owned by shareholders and policyholders. There will also be a separate shareholder fund which belongs entirely to shareholders. Dividends are paid to shareholders from this fund (they cannot be paid from the with-profits fund as this is owned, at least in part, by the policyholders). Often the shareholders fund is entitled to receive 1/9th of the cost of bonus declared. In this way 90% of surlpuses go to the policyholders and 10% is transferred to the shareholder fund. This 10% is the "transfer of profit to shareholders" that is deducted from the asset share. Best wishes Mark
