Twin-peaks assessment

Hello and thank you for this forum!

If a company has >500m with-profits liabilities it is classified as realistic-basis only. So it has to perform a twin-peaks assessment for it's with-profits business. More precisely for each of its with-profits funds.

1. If the company writes without-profits business also, but outside the with-profits fund(s), how is that without-profits business valued?
As if it is a regulatory-basis firm? So only Peak 1 for regulatory-basis firm.
OR
If valued as a realistic-basis only, would one be valuing the business only under Peak 1 for realistic-basis only firms. If that is the case, there would be no RCR - that would be a problem!

In either case the WPICC is only determined for the with-profits funds.

2. If the without-profits business is written within a with-profits fund(s), how is that without-profits business valued? I understand that the without-profits business being in the with-profits fund has an influence on the with-profits valuation under Peak 2 - both assets and liabilities because profits are being allocated from the without profits business. However, I don't have clarity on how the without profits business is valued.

Could you help me get clarity on this?
Thank you!

 

(1) A realistic-basis life firm only reports Peak 2 liabilities on the with-profits fund.

(2) The PVIF is included in realistic assets. The profits are added to increase the RBs/TB of WP policies, which would increase the cost of planned enhancements therefore future policy-related liabilities.

 

I had exactly the same question ... still unclear about it though.

Is it
1) Regulatory Basis Peak 1 or Realistic Basis Peak 1 or something else?
2) I understand that profits from without profits can be added to the assets based on regulatory profit, realistic profit or EV profit, but how are the without profit liabilities themselves accounted for?

 

I'd go with Regulatory Peak 1 for without-profits business in a with-profits fund.

I looked at this closer and I think in Ch11 the acted had mentioned that each with-profits FUND is valued under both peaks, core reading in Ch14 definitely says with-profits BUSINESS.

 

No, a company cannot be both regulatory and realistic at the same time. Since your example mentioned that it has >£500m WP liabilities, then this is a realistic-basis life firm.

The non-profits business is included in the Peak 1 calculation- you're right there is no RCR because it's a realistic-basis life firm.

Peak 2 calculation is done only on the WP fund.

The surpluses from the two peaks are compared to calculate the WPICC.

 

not sure about that:

1. one should be comparing like with like in peak 1 and peak 2 - surely it should be with-profits business only that you are comparing. Otherwise, if, say, for the with-profits business you have peak 1 surplus of 100 and peak 2 surplus of 50, then peak 2 will bite. WPICC = 50

2. now add some non-profits business in the w-p fund - say that has a surplus of 200 under Peak 1 (realistic basis as you suggest). if you did not include this in peak 2, then peak 2 will continue biting as you just adding surplus to peak 1 - so all the 200 is treated as a capital requirement all of a sudden... WPICC = 250

3. what if the non-profits business had a surplus of 0. then peak 2 will bite as in 1, WPICC = 50. But then where is the protection for the non-profits policyholders? If this were valued under a regulatory basis they would have the RCR protection.

 

Thanks! That helps - a little well part of my question is still unanswered:

Ok, and how are the liabilities of the NP business valued? Is there an RCR? - i.e. is it a regulatory basis Peak 1 or a realistic basis Peak 1 for the NP business? Surely we need an RCR to protect the policyholders.

Same question again: in the Peak 1, how are the liabilities of the NP business valued? Is there an RCR? - i.e. is it a regulatory basis Peak 1 or a realistic basis Peak 1 for the NP business? Surely we need an RCR to protect the policyholders. (I understand dropping the RCR for with-profits business in Peak 1 cause we add the MCR in Peak 2 so there is capital for the risks...)

I looked at IPRU-INS: Appendix 9.1; Form 18 - line 14 & 15 refer to LTICR and RCR for non-profit business. So my guess is that it is a regulatory basis Peak 1 for NP.

Also, for the Peak 2 asset quantification - I assume one has to remove assets belonging to the NP business. How is that quantified? From Form 19 in Appendix 9.1 it seems that this quantification is the NP liabilities as calculated in Peak 1 (Mathematical reserves + LTICR +RCR) as it says that line 11 in Form 19 is the same as line 19 in Form 18.

Am I going into some research on this or what!!! I need answers.

This is an interesting comparison, in a sense the EV of the NP business is split between the Peak 1 (free assets = assets - liabilities) and Peak 2 (PVIF). Does not entirely make sense but I'll take it

 

Thanks Lynn!