Mock exam b - Q. 2(ii)

This is an approximate calculation as we don't have all the information we require, so alternative numbers to 420 would be ok to. But this is how we get to 420.

The question says that:

"In calculating its embedded value the company allocates assets equal to its internal assessment of with-profits liabilities and mathematical reserves for non-participating business. It also allocates assets equal to the Long-Term Insurance Capital Requirement for non-participating business. Transfers from any excess assets in the long-term business fund over and above these amounts are valued at 10% of the market value of assets. Shareholders’ assets are included at market value."

For time X-2 we have assets of 8430.

Using an internal assessment of with-profits liabilities and mathematical reserves for non-participating business we have liabilities of 6325 + 600 + 650 = 7575.

We then need the Long-Term Insurance Capital Requirement for non-participating business. There's not much NP business, so we'll take this as 5.

So our free assets is 8430 - 7575 - 5 = 850.

Taking 10% of this for shareholders gives a value of the free assets of 85.

The value of future profits on without-profits and unit-linked business can be roughly estimated from the difference between the statutory and realistic liabilities.

The realistic reserve of the without-profits business is 550, but the reserve is 600. So a profit of 50 is locked away here. After the impact of discounting this might be worth 30.

The realistic reserve of the unit-linked business is 630, but the reserve is 650. So a profit of 20 is locked away here. After the impact of discounting this might be worth 17.

We know that the total EV is 550. So far we have only accounted for 85 + 30 +17 = 132. So we have 418 (rounded to 420 unaccounted for), which must be shareholder funds and transfers from with-profits bonus declarations.

I hope this helps explain the figures.

Best wishes

Mark