Shareholder transfers in EEV

[rathi]

Hi,

I have a few questions regarding with profits funds.

Principle 11 developed by the CFO Forum states that for with profits business, bonus allowances need to be made within the future liabilities but leaves open how the bonus rates need to be calculated. It also states that assumptions regarding profit allocation between policyholders and shareholders needs to be made.

The EEV is meant to disclose the shareholder value in the business.

1. So my thought process is that the liabilities therefore should not include an allowance for future shareholder transfers even if the liabilities allow for future bonuses for the policyholders. Is my understanding accurate?

2. Also, within the Solvency I (Pillar 1 Peak 1 and Pillar 1 Peak 2) liabilities and Solvency II BEL, is a company expected to allow for future shareholder transfers and policyholder bonuses with bonus rates in keeping with PRE? My understanding is that in the SII BEL, the SHIFT which is treated as an asset on the shareholder balance sheet allows for these transfers and therefore policyholder bonuses are allowed for in the BEL but not shareholder transfers.

3. If shareholder transfers and policyholder bonuses are allowed for in the SI and SII technical provisions, presumably, they are allowed for in the EEV within the free surplus calculation, i.e. assets - liabilities - required capital? If so (implying 1 above is wrong), then how is EEV calculating SHAREHOLDER value?

Thanks,
Rathi

 

[Em Francis]

Hi,

I have a few questions regarding with profits funds.

Principle 11 developed by the CFO Forum states that for with profits business, bonus allowances need to be made within the future liabilities but leaves open how the bonus rates need to be calculated. It also states that assumptions regarding profit allocation between policyholders and shareholders needs to be made.

The EEV is meant to disclose the shareholder value in the business.

1. So my thought process is that the liabilities therefore should not include an allowance for future shareholder transfers even if the liabilities allow for future bonuses for the policyholders. Is my understanding accurate?

The shareholder transfer will be part of the PVIF component of the EEV calculation. ie "the present value of future shareholder cash flows from in-force covered business."

2. Also, within the Solvency I (Pillar 1 Peak 1 and Pillar 1 Peak 2) liabilities and Solvency II BEL, is a company expected to allow for future shareholder transfers and policyholder bonuses with bonus rates in keeping with PRE? My understanding is that in the SII BEL, the SHIFT which is treated as an asset on the shareholder balance sheet allows for these transfers and therefore policyholder bonuses are allowed for in the BEL but not shareholder transfers.

Yes, the BEL for with profits business should not include the value of shareholder transfers in respect of future bonus declarations. These are not included as a liability, but should be valued separately.

3. If shareholder transfers and policyholder bonuses are allowed for in the SI and SII technical provisions, presumably, they are allowed for in the EEV within the free surplus calculation, i.e. assets - liabilities - required capital? If so (implying 1 above is wrong), then how is EEV calculating SHAREHOLDER value?

Under Solvency II, shareholder transfers are included in own funds not the technical provisions.

Under EEV, by definition, EEV is is a measure of the consolidated value of shareholders’ interests in the covered business. i.e shareholder value. And this is measured via:
· free surplus allocated to the covered business
· required capital, less the cost of holding required capital
· present value of future shareholder cash flows from in-force covered business (PVIF)

Thanks,
Rathi

[/QUOTE]

Hope this helps.

Thanks
Em

 

[rathi]

Thanks, Em.

One follow up question: In Solvency I, are shareholder transfers included in the liabilities?

Thanks,
Rathi

 

[Em Francis]

Thanks, Em.

One follow up question: In Solvency I, are shareholder transfers included in the liabilities?

Thanks,
Rathi

Hi

For Pillar 1 Peak 2 this will be a liability between the long-term business fund and the shareholders’ fund so yes it will need to make a provision for future shareholder transfers out of the with-profits fund to the shareholder fund.

Thanks
Em

 

[rathi]

Thanks, got it!

 

[edcvfr]

Hi

For Pillar 1 Peak 2 this will be a liability between the long-term business fund and the shareholders’ fund so yes it will need to make a provision for future shareholder transfers out of the with-profits fund to the shareholder fund.

Thanks
Em

Does Pillar 1 Peak 2 take into account future bonuses? If not, why would there be a liability to the shareholders' fund? I'm just thinking if it only takes into account declared bonuses, they would already be paid to the shareholder's funds on declaration. So there should be no liability there.

 

[Lynn Birchall]

Hi

Yes, Pillar 1 Peak 2 did take account of future bonuses

Thanks
Lynn

 

[edcvfr]

Hi

Yes, Pillar 1 Peak 2 did take account of future bonuses

Thanks
Lynn

Is that part of 'planned enhancements'?

 

[edcvfr]

Also this the following summary correct?

Solvency I Pillar 1 Peak 2
Future bonuses are accounted for in liabilities
Shareholder transfers are accounted for in liabilities

Solvency II Pillar 1
Future bonuses are accounted for in liabilities (but calculated separately from past bonuses)
Shareholder transfers are accounted for in own funds

 

[Em Francis]

Also this the following summary correct?

Solvency I Pillar 1 Peak 2
Future bonuses are accounted for in liabilities
Shareholder transfers are accounted for in liabilities

Solvency II Pillar 1
Future bonuses are accounted for in liabilities (but calculated separately from past bonuses)
Shareholder transfers are accounted for in own funds

This is true for shareholder transfers relating to participating business.

Thanks

Em