21 Surplus Distribution Flashcards

1
Q
Describe/compare the types of bonus:
- Regular reversionary
- Special reversionary
- Terminal
(6)
A

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.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

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

A
  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.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

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

A
  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.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

State two types of bonus rate smoothing. (2)

A
  1. Over time.

2. Between groups of policyholders.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

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

A
  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).
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

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

A
  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.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly