21 Surplus Distribution

Question 1

Describe/compare the types of bonus:
- Regular reversionary
- Special reversionary
- Terminal
(6)

Answer 1

RB:

• Sets PRE of maintenance of bonus rates.
• Impacts free assets or own funds if actual bonus rates differ from those used in the valuation basis.

SB:

• Lower PRE effect so less of a constraint.
• More likely to impact free assets or own fund as less likely to have been included in the TPs.

TB:

• Lower levels of guarantees and greater volatility of payouts compared to RB/SB.
• Results in more free assets / own funds so allows greater investment freedom.

Question 2

Describe the general suitability of different sources of surplus for distribution as different types of bonus. (3)

Answer 2

1. Surpluses that expected to arise regularly (e.g. from explicit bonus loadings in premiums) would be suitable for RB.
2. Surplus that is expected only in one-off occasions is most suitable for SB.
3. Surpluses that are less regular or predictable are suitable for TB.

Question 3

List seven factors that will influence the timing of surplus distribution. (7)

Answer 3

1. The company’s financial aims (e.g. to maximise returns to policyholders).
2. Level of guarantees.
3. Free Assets / Own Funds.
4. Investment Strategy / Freedom.
5. Achieving Equity.
6. TCF / PRE.
7. Shareholder transfers.

Question 4

State two types of bonus rate smoothing. (2)

Answer 4

1. Over time.

2. Between groups of policyholders.

Question 5

List five factors that affect the degree of smoothing. (5)

Answer 5

1. TCF
2. The method of distributing surplus.
3. The assets backing the contracts.
4. Free Assets / Own Funds.
5. Company policy (set out in the PPFM).

Question 6

List four investigations a company would perform in making its bonus decisions. (4)

Answer 6

1. Relevant experience investigations (in order to determine asset shares).
2. Bonus supportability (especially of RB rates).
3. Bonus equity (especially of TB rates).
4. ALM to assess future solvency.