Chapter 16 - Unit Pricing

Question 1

Unit-linked recurring investment product that allows individuals to
invest in property via the insurance company, with the underlying policyholder funds being invested directly in properties:

Describe how the value of the units would be determined for the property portfolio[4]

2013_s2

Answer 1

• This will be done at the appropriation price
• The market value of the assets would need to be obtained
• As the assets are direct property, there is unlikely to be an observable market value.
• A mark to model approach or use of a property valuation company will be necessary
• A mark to model approach could model the expected cashflows of the property using a financial economic approach where unknown parameters are set so as to be consistent with market values where a corresponding market exists
• Any expenses involved in purchasing additional assets will need to be added
• Any current assets would need to be added
• Any current liabilities will need to be subtracted
• The price will need to be increased for any accrued income
• Less allowance for accrued tax
• This would be divided by the number of units to get the price

Question 2

State the equity principle that should be applied to the pricing of an internal unit-linked fund and describe the process for calculating the appropriation prices for the fund.[4]

2014_s2

Answer 2

• The equity principle for the internal unit fund states that the interests of unit-holders not involved in a unit transaction should be unaffected by that transaction.

Calculation of the appropriation price (creation of units):
Determine the net asset value of the fund on an “offer basis”:

• market “offer price” value of the assets held by the fund
• plus the expenses (including stamp duty on purchase) that would be incurred in the purchase of these assets
• plus the value of any current assets (e.g. cash on deposit)
• less the value of any current liabilities (e.g. investments purchased but not yet settled)
• Plus any accrued income, (e.g. interest income from fixed-interest securities and deposits, net of any outgo, such as fund charges)
• less any allowance for accrued tax (if applicable)

Divide by the number of units existing at the valuation date (before any units are created/ cancelled)

Question 3

Explain the basic equity principle that applies to the pricing of an internal unit-linked fund. [2]

2015_s2

Answer 3

Basic equity principle:

• The basic equity principle of unit pricing for an internal fund states that: the interests of unit holders not involved in a unit transaction should be unaffected by that transaction.
• For the holder of a unit the only prices relevant are those at which they buy units in the fund and those at which they redeem units
• In theory, the movement in price between those two events should only reflect the performance of the assets backing the unit
• and charges deductible under the policy terms
• Therefore the price of units should not be affected by creation or cancellation of other units, otherwise cross subsidies between unit holders will arise.

Question 4

Define the appropriation price of a unit fund and describe how the basic equity principle is applied when determining the appropriation price for a fund. [1]

2015_s2

Answer 4

• The appropriation price is the price at which an insurer will create a unit i.e. the amount of money that must be put into the fund for the creation of a unit.
• To achieve the basic principle of equity this price per unit is such that the net asset value per unit is the same before and after the creation of the units.

Question 5

Define the expropriation price of a unit and explain briefly how it is calculated. [3]

2021_S2

Answer 5

Expropriation price:
* The expropriation price is the price at which a company would cancel a unit,
* and is calculated as:
* 1.The market bid price value of assets held by the fund;
* 2. less the expenses incurred in the purchase and stamp (and other duties) payable in respect of such a purchase;
* 3. plus the value of any current assets, such as cash on deposit or investments sold but not yet settled
* 4. less the value of any current liabilities, such as investments purchased but not yet settled or loans to the fund;
* 5. plus any accrued income such as interest income from fixed-interest securities and deposits, net of any outgo, such as fund charges;
* 6. less any allowance for accrued tax, if applicable.

• This gives the net asset value of the fund on a bid basis,
• which is divided by the number of existing units at the valuation date.