16. Surplus Distribution Policy

Question 1

Factors affecting degree of smoothing

Answer 1

• PRE
• Method of surplus distribution
• Asset mix backing contracts (investment strategy)
• Size of BSR
• Equity between classes and generations of ph

Question 2

Sources of Surplus (WP)

Answer 2

I WOMEM

• Investment
• Withdrawal
• Other contracts
• Mortality and other risk
• Expense
• Mismatching

Question 3

BSR

Answer 3

• past accumulation of over and under declarations of bonuses relative to actual investment return earned
• essentially the difference between bonuses declared (book value) and the actual investment return earned (market value - EAS)
• may be held under FSV
• under SAM, future disc benefits allowed for in BEL, assumed future bonuses set st the BSR absorbed into TP
• BSR mechanism to ensure smoothing of WP portfolio
• positive BSR –> assets underlying WP fund > liab, fund declared lower bonus than supported by distributable surplus over period
• positive BSR distributed to ph in form of bonuses over time
• negative BSR –> assets underlying WP fund < liab, fund declared higher bonus than supported by distributable surplus over period
• negative BSR recouped over time by declaring lower bonus than supported by distributable surplus over time
• Under SAP 104: negative BSR may be held if insurer relatively certain it can recoup over 3 years
• extent of negative BSR governed by rules of WP fund, PPFM, contract with policyholder

BSR too:
- negative: support from FA
- BSR too large: unfair to existing policyholder (actuary shouldn’t be overly prudent in setting bonus rates)
- BSR too small: inhibit company ability to write NB,

• BSR can be used to accelerate surplus distribution –> NAV increase if shareholder transfer increase and emerge more rapidly

Question 4

Level of vesting vs terminal bonuses

Answer 4

• deferring surplus distribution conserves capital –> TBs represent ultimate deferment of dbn of surplus to ph
• insurer also aims to maximise SHAREHOLDER transfers
• regular vesting bonuses provide earlier transfers to sh than TBs
• particularly if SH funding NB themselves, will want earlier distribution of surplus

Question 5

Regular bonuses vs terminal bonuses

Answer 5

Regular bonuses most appropriate for distributing stable, recurring sources of surplus: generally used to distribute investment surplus

Terminal bonuses most appropriate for distributing volatile sources of surplus: mortality, expense, withdrawal, other business

Question 6

Uses of EAS

Answer 6

• benchmark for determining payout to WP ph
• guide for determining maturity values, setting SVs
• help smoothing process for maturity values
• used within reserving process
• used to derive BSR of some companies
• used in calculation of IGR (APN 110)
• tool for consideration and quantification of TCF

Question 7

bonuses

Answer 7

• essentially amount that company decides to declare to with-profits policyholders in respect of actual returns over the period

Question 8

Smoothing

Answer 8

• idea behind SB product is to reduce volatility and provide investors with stable growth reflecting market return over time