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October 2010 Question 6 (iv)

N

nyaman

Very Active Member
There is a statement in the solution that I do not quite understand. It says that the small effect of smoothing on the total asset shares should lead to affordable policy maturity values in aggregate. Is it because the smoothed asset shares are less than the aggregate asset shares? Also why is there almost no change to the free assets from this smoothing? Is it because the discrepancy is very small when the asset shares are compared?
 
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Hi

Yes, it's the small difference between aggregate asset shares and the sum of individual asset shares that makes payouts based on individual asset shares affordable. Any difference between what the company pays out (based on individual asset shares) and the assets it actually has (aggregate asset shares) will lead to an increase/decrease in free assets. Here, this change to the free assets is only small.

Best wishes
Lynn
 
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