Asset Share WL Pricing vs. PTS Profit Results

[Cogent One]

My co. uses AS pricing to solve for dividends based on a required goal of AS=CV at the end of the funding goal period (20 or 30 yrs). We have some other constraints that allow us to manipulate the "shape" of the dividends, while still meeting the required funding goal. We don't use a 3 part dividend formula until after the funding goal period. Typically the AS int rate = the dividend int (net of invest expenses, expected loan usage, etc.)

Once we've solved for the dividends based on this goal (we also include an explicit Surplus Contribution charge as part of the AS calculation) we then transfer these dividends to PTS to calculate more recognizable profit measures.

At this point we have difficulty reconciling the profit results from PTS (particularly the IRR) with the expected results from the AS solves.

I remember from some of my exam reading a while ago that there is a relationship between pricing under the IRR methodology and the AS method. The FSAs around here have vague recollections that the methods are "mathematically equivalent" and they wave their hands around a lot.

But I'd really like to get a better understanding about how these methods relate. Particularly, when we did a dividend scale decrease (lowered the div rate and recalced divs w/the same funding goal and general shape by our AS method) I expected the PTS profits to not change much given the lower dividends and int rate.

Can anyone shed some light on the general topic of how the AS method relates to IRR pricing? Or specifically regarding how a decrease in div int rate may cause anomolies with the IRR movement? Are the IRR and AS methods comparable only when using 3 part dividends?

Thanks in advance for your insights.

[mayreeh]

Not that I have an answer, but have you combed through the big life insurance textbook from course 5 and course 8I? Seems like they might have discussed some of that in there..... It sounds familiar.

[NoName]

I'm not sure what you mean exactly. If I understand correctly you are projecting the business in two different systems. The first thing to check is whether the two systems are giving comparable results. I haven't used PTS but I assume you can run an asset-share projection (by not distributing earnings). You should check whether it gives you asset shares at 20/30 years that are close to the cash value, if that is what you should get based on the other system.

If not, you need to reconcile the two systems (or else abandon one and convince yourself of the correctness of the other). If so I think what you're saying is that the magnitude of the change in IRR for a given change in policy values is not always intuitive. This can happen. I don't know what you mean by the two methods being equivalent; they are measuring different things. You could have a product where you had a gain at issue and a string of positive profits thereafter; the IRR would be undefined. You could also have a product with a more typical pattern of results that does yield an IRR, but the two products could easily develop the same asset share 20 years out.

I think you'll need to provide more information.