Sept 2017 Q2 (iii) - determining the value of future new business paid by NPF to WPF

[Ashna Satyajit]

Hi,

I am unable to understand the Examiner's report Solution for September 2017 Q2 (iii) which asks us to "determine the amount of assets paid by the NPF to the WPF in respect of future new business".

As per my understanding, this asset amount should reflect the future profits of the immediate annuity business (which are now going into the NPF) that were previously distributed to the WP policyholders. The Solution mentions determining a one-off surplus amount that would be paid from the NPF to the WPF, which makes sense.

It also makes sense to arrive at the value of this one-off surplus based on expected future profits - which (I understand) would be the future profits expected from the immediate annuities - because that is what is required to be paid back to the WP fund. The future profits within the WP fund from the WP products don't need to be determined here, since those will remain in the WP Fund anyway.

However, the Solution says the following:
"The key element will be the anticipated new business volume
and whether this new business is from maturing with profits policies or from external sources
if it comes from the with-profits business, then the WPF may be entitled to more value."

This doesn't make sense to me.
1. Why are we looking at the profit generated from the WP Fund if we need to determine the profit from the immediate annuities that belong to the WP Fund?
2. The WP business is stated to be closed to new business for years. So how would there be any anticipated new business volume coming from the with profits business?

 

[Em Francis]

Hi,

I am unable to understand the Examiner's report Solution for September 2017 Q2 (iii) which asks us to "determine the amount of assets paid by the NPF to the WPF in respect of future new business".

As per my understanding, this asset amount should reflect the future profits of the immediate annuity business (which are now going into the NPF) that were previously distributed to the WP policyholders. The Solution mentions determining a one-off surplus amount that would be paid from the NPF to the WPF, which makes sense.

It also makes sense to arrive at the value of this one-off surplus based on expected future profits - which (I understand) would be the future profits expected from the immediate annuities - because that is what is required to be paid back to the WP fund. The future profits within the WP fund from the WP products don't need to be determined here, since those will remain in the WP Fund anyway.

However, the Solution says the following:
"The key element will be the anticipated new business volume
and whether this new business is from maturing with profits policies or from external sources
if it comes from the with-profits business, then the WPF may be entitled to more value."

This doesn't make sense to me.
1. Why are we looking at the profit generated from the WP Fund if we need to determine the profit from the immediate annuities that belong to the WP Fund?
2. The WP business is stated to be closed to new business for years. So how would there be any anticipated new business volume coming from the with profits business?

Hi

I think I can answer both your queries by explaining that these comments are in relation to: 'any amount that is paid by the NPF to the WPF in respect of future new business' where the source of the business is the WP fund as the maturing WP policyholders could potentially be new business for NP annuities, ie the maturing WP payouts could be used to purchase a NP annuity.

Does this help?

 

[Ashna Satyajit]

Hi Em,

Thanks for your response, yes that does make the Solution statement clear. However, why would the WP Fund be entitled to more share of the profit if the new business is coming from the maturing WP? won't the source of new business be irrelevant?

 

[Em Francis]

Note it just says 'may', it will depend on what has been agreed and promised to the wp policyholders. This should be communicated in any customer facing literature.

 

[Ashna Satyajit]

I agree and from what I understand, usually cases like this - where an NP product is being moved out of a WP fund - were driven by former mutual companies where all the profit was passed on to the policyholders. In such a case, it wouldn't really make sense for a differential treatment based on the nature of the profit, I feel. Also, even if these were just WP products that were being written in a fund with NP products, I am struggling to understand why the source of new business matters. Could customer literature capture this level of detail? Where the source of profit (and hence type of new business) would mean a greater share is passed on to the policyholder?

 

[Em Francis]

Possibly. Let's not lose focus of what the question is asking us...'to 'describe' considerations , so it is viable that this is a consideration the company would take into account when determining what is fair to transfer over and what is fair to keep within the WP fund for the benefit of the WP policyholders. I

I suggest reading a PPFM. However you will not be expected to know the details of such a document.