September 2006 Q3(ii) - Actuarial funding

From looking at the examiners solution here and the ASET solution it seems to be suggesting that the acturial funding factor is applied to the fully funded value of the CAPITAL UNITS only. I was under the impression that it is applied to capital + accumulation units.

Can someone confirm which way is correct?

Also there is a comment in the ASET solution to this question I don't quite follow:

"The SV is determined on terms that are guaranteed under the policy. So to meet reserving principles the acturailly funded value of accumulation units must not be lower than face value of capital units less surrender penalty. As this will ensure the current SV is held as a minimum reserve at all times."

Is this just a long and cryptic way of saying that the value of actuarial funded units must not be less than the SV payable. If it is I can't see how it is saying this. Can someone please explain.

Thanks in advance.

 

Hi. Not taking this subject so may be wrong....

I think that capital units are pretty much always actuarial funded. Accumulation units would pretty much never be as there're wont be surrender penalties to ensure that we can take amc up front via actuarial funding without being caught short where surrenders occur.

The surrender penalty is just a cheeky way of presenting high initial fees to the client in a more palatable way. Surrender penalty will be the same as the remaining amount of future higher amc that has been taken up front. The only time the client will receive the fictitious value of the units is in the case of death. I reckon in your quoted paragraph they mean capital units where they say accumulation, but don't really know.

 

Following from Elroy's last point- I've checked our latest aset document for this and it is written incorrectly - so there is a mistake, it should say capital units not accumulation units here.

And yes, basically you need to apply a surrender penalty so that the surrender value is not greater than the actuarially funded unit reserve.

Sorry about the mistake. Thanks for picking it up.

 

Ok thanks.

So when applying an acturail funding factor you only apply this to the capital units and not the total value of units (capital + accumulation)

 

yep, that's it!