Without Profits reserving in WP fund

[Nettie]

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.

 

[wonnoemoc]

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.

 

[Mike Lewry]

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.

 

[Nettie]

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?

 

[Nettie]

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...

 

[Mike Lewry]

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

 

[calibre2001]

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

Reinsurance of mortality risks
Reinsurance on immediate annuities has no impact on the realistic balance
sheet as these policies are not written in the with profits fund.
Reinsurance of mortality risk on term assurance business will probably reduce the present value of future profits on this business, due to profits ceded to the reinsurer. This may be offset to some extent if it is possible to reduce the mortality rate assumption given the reduction in risk. However, overall realistic assets are likely to be reduced.
Realistic liabilities will be unchanged, since there has been no change to the with profits business, therefore overall working capital is likely to reduce.
The RCM does not include a mortality stress and so will be basically unchanged.

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

 

[Mark Willder]

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


Quote:
Reinsurance of mortality risks
Reinsurance on immediate annuities has no impact on the realistic balance
sheet as these policies are not written in the with profits fund.
Reinsurance of mortality risk on term assurance business will probably reduce the present value of future profits on this business, due to profits ceded to the reinsurer. This may be offset to some extent if it is possible to reduce the mortality rate assumption given the reduction in risk. However, overall realistic assets are likely to be reduced.
Realistic liabilities will be unchanged, since there has been no change to the with profits business, therefore overall working capital is likely to reduce.
The RCM does not include a mortality stress and so will be basically unchanged.

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

I think this is saying that any change in the RCM would be trivial. By reinsuring the term assurances (TA) we would have fewer assets. So the impact of the RCM stresses would be lower. But as TA assets are low and investing largely in short term deposits, the impact of the RCM is small.

Best wishes

Mark