8GM - "Asset Share" models

[Not Mike]

What exactly does an "Asset Share" model consist of? What makes it an assest share model? Does it have something to do with distribution of assets between product lines? I'm confused...

[Gandalf]

Since no one who has seen the syllabus material has chosen to respond, I'll take a shot. Use with caution. Hopefully, it will seem to fit with the readings.

The main distinction would be between "Asset Share" models and "Book Profit" models.

Asset Share models focus on accumulated profits. (That much I'm sure of; rest gets subjective). Accumulations are at actual earned rates. Within the projection period, there is no use of required surplus, except possibly for mutual company equity tax calculations. Within the projection period, reserves relevant only to the extent they affect cash flows, particularly income tax. The asset share just reflects the accumulated cash flows, including tax.

At least for individual life, the Asset Share profit target would probably be expressed as per policy or per thousand remaining in force at the end of the projection period: E.g., asset share should exceed reserve or cash value then by $X, or possibly asset share should be (100 + y)% of reserve or cash value.

Book Profit models, on the other hand, focus on present value of profits. The present value is calculated at a cost of capital rate, normally higher than the asset earnings rate. Reserves always are used; Required surplus normally is. Each year during the projection period, beginning of year assets are set equal to beginning reserves + required surplus.

Often the profit target will be expressed as % of first year commission, first year premium, or first year loss, with present value at a discount rate set in advance. Alternatively, it can be an IRR-like calculation, solving for the discount rate that makes present value of book profits = 0.

OK, there's some specific allegations about Asset Shares and Book Profits. Where I'm off base from the syllabus, I hope someone will speak up.