Introduction
Investment income earned on:
A. Assets supporting policy reserves
B. Cash flows (CF) that occur during the policy year
A. Investment income based on assets supporting the product:
— Investment income is calculated based on
o The assets needed to support the product
o Not the assets developed from the product’s cumulative CFs
— Assets = Solvency Reserves + Required Capital à to support a product
o Assets = Solvency Reserves (assumption we make for simplicity)
§ Company’s owners contribute additional capital when it’s needed
They withdraw excess capital when it is available
B. Investment income based on cumulative CFs:
— Doesn’t consider capital contributions and distributions
— It accumulates insurance CFs with interest, net taxes
o If there’re ??tive cumulative CFs in the early years, they accumulate ??tive interest
o ??tive interest: borrowing from the company’s owners & paying them interest
— In the later years, typically assets > solvency reserves + required capital
o Interest earned on assets adds even more
— Not appropriate for calculating profits, but useful for a mutual company that has
o No outside source of capital
o No one but policy owners to receive excess capital
— It is used to calculate asset shares
o Asset shares = CFs accumulated with interest + net of taxes
Calculated on a per unit in force
Assuming no capital contributions or distributions
o Useful to determine the share of a company’s assets that resulted from a certain group of
policies
o Asset shares can be useful for
