Models (2) chapter solutions to Q14

[CAKABOGU23]

"the surplus which eventually accrues in respect of any with-profits policy should be reduced by some cost of capital"
Does this imply this isn't what happens in reality?
In reality, does surplus accrue in the with-profits fund and then policyholders receive a distribution via bonuses, the amount of which depends on the asset share of the policy?

 

[Mark Willder]

"the surplus which eventually accrues in respect of any with-profits policy should be reduced by some cost of capital"
Does this imply this isn't what happens in reality?
In reality, does surplus accrue in the with-profits fund and then policyholders receive a distribution via bonuses, the amount of which depends on the asset share of the policy?

Hi

How accurately the cost of capital is allowed for in the asset share varies from company to company. If the insurer allows for the cost of capital in the asset share then this reduces the asset share.

Best wishes

Mark