Without Profits reserving in WP fund

Hi,

I am just trying to once again perfectly understand the twin-peaks...

If I have a WP fund as follows:
Assets = 1800m
Liability = 700m
RCM = 200m
Free surplus therefore = 900m

And I then sell a term assurance that looks as follows:
Stat Reserve = -100m
RCR = 50m
LTICR = 30m
VIF = 40m (includes the LTICR and RCR release)

Would my WP fund now look as follows?:
Assets = 1800+(-100+50+30) + 40 = 1820m
Liability = 700m (Liab does not get affected by without profits business?)
RCM = 200m
Free = 920m

If they then tell you to consider any changes to the term assurance product: do you only have to talk about the resulting impact on the VIF?

Thank you very much for your time.

 

Hi Nettie

I think the WP fund would look as follows:
Assets = 1800+(-100-30) + 40 = 1710m
Liability = 700m (Liab does not get affected by without profits business?)
RCM = 200m *(see note 3)
Free = 920m

Notes
1. As this a Realistic basis life fund, there would be no RCR. So I have excluded this from the calculations of the assets - I made the exact same mistake a few days back in my reply to one of the posts.
http://www.acted.co.uk/forums/showthread.php?t=5543

2. The 40 would be the discounted valued of future profits (DVFP) on the NP business. I believe this is the VIF you were referring to. I think they mean the same - but not sure.

3. I think this would change as NP reserves and DVFP would change under the RCM stresses - which would affect the working capital. The liabilities however, as you mentioned earlier would not change.

4. Consequently working capital would change.

I would suggest waiting for an ActEd tutor or an experienced member to check if what I have stated above is correct as I have been wrong in the recent past.

Good luck.

 

wonnoemoc's reply looks good, althrough the "Free" amount will need to be changes to reflect the amended numbers above.

Adjustments are also needed to the assets figure to reflect the premium incoome and the expenses outgo in respect of the term assurance business just written.

 

Hi,

Thank you soooo much!

I think the numbers have one mistake...:

I think the WP fund would look as follows:
Assets = 1800+(+100-30) + 40 = 1910m - Agree? Due to the fact that it is a negative reserve.
Liability = 700m (Liab does not get affected by without profits business)
RCM = 200m *(see note below)

So, in the RCM we will show any changes in VIF due to their stresses? Or would we show changes to reserves as well? Is it more a shock to EV or a shock to VIF that is being captured in RCM?

 

One more thing on the RCR not being included for the without profits business in the WP fund. I thought the RCR falls away in the twin peaks fund only for WP business? So, what you're saying is that the capital requirements of even without profits business changes when the with profits need to be valued on a twin peak basis?

This is probably why the RCM stress now stresses the without profits as well. Otherwise without profits would lose their RCR stress and get no RCM stress applied...?

So, peak 1 has without profits in the assets, in the liab and in the LTICR. Then peak 2 has them out of the assets (except for VIF) out of liability - so this is what makes the peaks comparable?

Can't wait for Solvency II...

 

Yes agree change of sign above.
Correct - no RCR at all for realistic reporters.
Inclusion of NP is as you say

 

There seems to be a contradiction on what happens to the RCM in SA2 Sept 2007 Q1 ii) c).
Am I seeing something wrong?

Is it saying RCM changes but in an insignificant way or just doesn't plain change?