Term assurance is an xse product whereas Endownments(EA) are xsi products. So for term assurances(TA) E>I. What does this imply for expense and inv return on TA? I read that receiving tax relief on the expenses is the most important part here so we can price on a net/net basis? I dont get this? What does net/net mean here? Similarly for EA I>E. I read receiving investment returns gross of tax is good. So gross/gross is good? What does this mean? So how do you get gross/gross or net/net invest returns/expenses? Does this depend on the overall company position? What would an example of how pricing a TA would be effected if a company went from A) XSI to XSE B) XSE to XSI Any help would be appreciated on this! Cheers.
Yes, endowments generate more I than E, and term assurances generate more E than I. However, companies are taxed on their overall position. Consider a company that is XSI (perhaps because it sells large amounts of endowment business). The company will need to pay tax on its I-E. So the company should price assuming net investment return and net expenses. For endowments the most important factor is the investment assumption. Pricing using net I makes these contracts relatively expensive. For TA the most important factor is the expense assumption. Pricing using net E makes these contracts relatively cheap. Now consider a company that is XSE (perhaps because it sells large amounts of TA business). The company will pay no tax on its I-E. So the company should price assuming it receives gross investment return and pays gross expenses. For endowments, pricing using gross I makes these contracts relatively cheap (because we are assuming a higher investment return than the XSI company. For TA, pricing using gross E makes these contracts relatively expensive (because we need to charge for higher expenses than the XSI company). If the company changes tax position between XSI and XSE then it will make tax profits and losses depending on the type of business sold. For example, if a company moves from XSI to XSE it will have priced assuming that it will receive net I and pay net E, but it will actaully receive the higher gross I and pay the higher gross E. This leads to a loss on TA business as we have priced assuming tax relief on expenses but we actually have to pay the full gross expenses. This leads to a profit on endowment business as we have priced assuming low net investment returns but we actually receive the full gross investment return. The situation is similar if the company moves from XSE to XSI. The company will make tax profits on endowments, but tax losses on TA. Best wishes Mark
