Can someone pls help to explain the paragraph below? "changing the with-profits valuation basis may not change the value placed by shareholders on long-term free assets. This is because for the purpose of the embedded value, the company may have allocated asset shares to with-profits business in order to produce a realistic future pattern of bonuses." Tqvm
The free assets within the with-profits fund do not all belong to the shareholders. In a 90/10 fund only 10% belongs to shareholders. The notes describe two ways to value these free assets. Firstly we could just add 10% of the free assets to the asset share. In this case, changing the valuation basis will have no impact on the value of the free assets in the EV. Note, in this case we have only allocated the asset shares to the with-profits business as stated in the solution. Secondly we could allocate all the assets to with-profits business (ie both assets shares and the free assets) and then project bonuses which would exhaust the free assets over the lifetime of the in force policies. In this case, changing the valuation interest rate would change the cost of the bonus (as described in the preceding paragraph of the solution) and hene would change the EV. Best wishes Mark
1. Why would changing the basis have no effect on value of free assets in EV? If there was a change in basis wouldn't there be an effect on the asset share and thus the actual free assets would change?
The asset share is the retrospective accumulation using the actual past experience. So it is completely independent of the valuation basis. Best wishes Mark
