With Profits EV

[Mbotha]

I'm a bit confused about the EV for WP business:

• PVIF = (PV of projected cashflows) - (PV of change in reserve) = (a) - (b). I'm not sure how to calculate (a):
  • Is this a projection of the asset share?
  • How do we allow for shareholder transfers when these are usually deducted from the asset share calculation (assuming the above point is correct)?
  • In terms of the estate, would we model the shareholder's share as a simple % (say 10%)?
  • In the free assets component of the EV (in this case), what is included if all shareholder transfers are being modelled in (a)?
• Alternatively, shareholder transfers can be allowed for within the free assets component of the EV. Would this mean that, for (a) in the PVIF, we just need to project asset shares including shareholder transfer deductions (so as not to double-count)?

 

[Em Francis]

I'm a bit confused about the EV for WP business:

• PVIF = (PV of projected cashflows) - (PV of change in reserve) = (a) - (b). I'm not sure how to calculate (a):
  • Is this a projection of the asset share?
  • How do we allow for shareholder transfers when these are usually deducted from the asset share calculation (assuming the above point is correct)?
  • In terms of the estate, would we model the shareholder's share as a simple % (say 10%)?

It may help to think of calculating the PVIF as follows:

Allocate assets to the reserve (this may be BEL only if the Risk Margin is allowed for in the required capital (and modelled separately) as part of EV or could be the Technical Provisions (TP) if otherwise). As an approximation to BEL, the asset share could be used plus any with-profits guarantees).

Having allocated assets, the assets and in-force business are projected forward on an actively-reviewed, broadly realistic basis.

If it is a 90:10 fund, shareholder transfers made are one-ninth of the cost of bonuses (RB and TB) and therefore projected future bonus rates are required.

The excess of projected assets over projected BEL (or TP) are the shareholder transfer each year. These transfers are discounted back at a suitable risk discount rate (RDR) and it is this that equals the PVIF component of the EV calculation.

• [*]

  • In the free assets component of the EV (in this case), what is included if all shareholder transfers are being modelled in (a)?

  [*]Alternatively, shareholder transfers can be allowed for within the free assets component of the EV. Would this mean that, for (a) in the PVIF, we just need to project asset shares including shareholder transfer deductions (so as not to double-count)?

if you think of the free assets as the shareholder own funds then it may help to think of the Core Reading from Chapter 19 of CMP:
If with-profits business is written, the embedded value may include the present value of future shareholder transfers and any interest in the estate as PVIF, to the extent that this has not already been included in the embedded value as part of the shareholder own funds.

Hope this helps.

Em

 

[Viki2010]

It may help to think of calculating the PVIF as follows:

Allocate assets to the reserve (this may be BEL only if the Risk Margin is allowed for in the required capital (and modelled separately) as part of EV or could be the Technical Provisions (TP) if otherwise). As an approximation to BEL, the asset share could be used plus any with-profits guarantees).

Having allocated assets, the assets and in-force business are projected forward on an actively-reviewed, broadly realistic basis.

If it is a 90:10 fund, shareholder transfers made are one-ninth of the cost of bonuses (RB and TB) and therefore projected future bonus rates are required.

The excess of projected assets over projected BEL (or TP) are the shareholder transfer each year. These transfers are discounted back at a suitable risk discount rate (RDR) and it is this that equals the PVIF component of the EV calculation.

if you think of the free assets as the shareholder own funds then it may help to think of the Core Reading from Chapter 19 of CMP:
If with-profits business is written, the embedded value may include the present value of future shareholder transfers and any interest in the estate as PVIF, to the extent that this has not already been included in the embedded value as part of the shareholder own funds.

Hope this helps.

Em

And how would inherited estate be treated? The core reading suggests that it can either be part of free surplus or pvif.

 

[Em Francis]

And how would inherited estate be treated? The core reading suggests that it can either be part of free surplus or pvif.

The inherited estate is that part of the with-profits fund over and above that which is required to meet the realistic liabilities.

However the use to which the inherited estate can be put is an area that has been undergoing much debate within the industry. Uses in practice have included:

• aiding investment flexibility for the with-profits fund
  
  
• helping to meet regulatory capital requirements
  
  
• paying tax incurred by the fund on distributions to shareholders
  
  
• covering over-runs on existing and new business expenses
  
  
• helping to support smoothing flexibility.

• You might want to refer to: https://www.acted.co.uk/forums/index.php?threads/capital-management-ch15.13689/
• Also, see Section 2.1 of Chapter 12 CMP.

undergoing much debate within the industry. Uses in practice have included:

● aiding investment flexibility for the with-profits fund

● helping to meet regulatory capital requirements

● paying tax incurred by the fund on distributions to shareholders

● covering over-runs on existing and new business expenses

● helping to support smoothing flexibility.

And how would inherited estate be treated? The core reading suggests that it can either be part of free surplus or pvif.

 

[Viki2010]

The inherited estate is that part of the with-profits fund over and above that which is required to meet the realistic liabilities.

However the use to which the inherited estate can be put is an area that has been undergoing much debate within the industry. Uses in practice have included:

• aiding investment flexibility for the with-profits fund
  
  
• helping to meet regulatory capital requirements
  
  
• paying tax incurred by the fund on distributions to shareholders
  
  
• covering over-runs on existing and new business expenses
  
  
• helping to support smoothing flexibility.

• You might want to refer to: https://www.acted.co.uk/forums/index.php?threads/capital-management-ch15.13689/
• Also, see Section 2.1 of Chapter 12 CMP.

undergoing much debate within the industry. Uses in practice have included:

● aiding investment flexibility for the with-profits fund

● helping to meet regulatory capital requirements

● paying tax incurred by the fund on distributions to shareholders

● covering over-runs on existing and new business expenses

● helping to support smoothing flexibility.

Thanks, I have read the core reading. I was just asking how the Inherited Estate would be accounted for in EV calculations for With Profits. The core reading was implying that two methods are allowed: accounting in free surplus or in PVIF. I guess in both as well. I was just curious how would you allow for it in PVIF?

 

[Lynn Birchall]

Thanks, I have read the core reading. I was just asking how the Inherited Estate would be accounted for in EV calculations for With Profits. The core reading was implying that two methods are allowed: accounting in free surplus or in PVIF. I guess in both as well. I was just curious how would you allow for it in PVIF?

If allowing for it in the PVIF, the projected future bonus rates would be higher (as more assets are being projected) and those higher future bonuses would turn to higher future shareholder profits in the PVIF.