Q21.4

[Avviey]

Hi

The answer to this question re participating business, it says, "in our profit formula we could write up the fund value so that I was large enough to offset the E...." So where would we get this large "I" from in the first place? Could you pleaes explain? Thank you very much.

 

[Mark Willder]

The answer to this question re participating business, it says, "in our profit formula we could write up the fund value so that I was large enough to offset the E...." So where would we get this large "I" from in the first place? Could you pleaes explain? Thank you very much.

When we work out the profit for with-profits business in the FSA returns (which is currently also used for tax purposes), we do not use the actual investment return. Instead we use the return required to cover the bonuses we wish to declare. The balance of the investment return (which may be either positive or negative) goes into the investment reserve.

This process allows us to declare smoothed bonuses and hold money back for terminal bonus.

In good investment years, we only recognise part of the investment return in the FSA surplus and declare a lower regular bonus than we could otherwise afford. The excess investment return is passed to the investment reserve.

In bad investment years, we recognise a higher investment return than we have actually achieved and declare a higher regular bonus than we could otherwise afford. This is because we do not want to reduce the bonus rate too much. To balance the books we have enhanced the investment return by taking money from the investment reserve.

The investment reserve must always be positive. We would hope that good years outweigh the bad years (if we have been prudent in our assumptions) so that the investment reserve grows over the life of the contract. Any excess can then be returned to the policyholder as a terminal bonus.

Details of the fund value can be found in Chapter 9 pages 10 and 11.

Best wishes

Mark