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.
2
Q
Describe the general suitability of different sources of surplus for distribution as different types of bonus. (3)
A
- Surpluses that expected to arise regularly (e.g. from explicit bonus loadings in premiums) would be suitable for RB.
- Surplus that is expected only in one-off occasions is most suitable for SB.
- Surpluses that are less regular or predictable are suitable for TB.
3
Q
List seven factors that will influence the timing of surplus distribution. (7)
A
- The company’s financial aims (e.g. to maximise returns to policyholders).
- Level of guarantees.
- Free Assets / Own Funds.
- Investment Strategy / Freedom.
- Achieving Equity.
- TCF / PRE.
- Shareholder transfers.
4
Q
State two types of bonus rate smoothing. (2)
A
- Over time.
2. Between groups of policyholders.
5
Q
List five factors that affect the degree of smoothing. (5)
A
- TCF
- The method of distributing surplus.
- The assets backing the contracts.
- Free Assets / Own Funds.
- Company policy (set out in the PPFM).
6
Q
List four investigations a company would perform in making its bonus decisions. (4)
A
- Relevant experience investigations (in order to determine asset shares).
- Bonus supportability (especially of RB rates).
- Bonus equity (especially of TB rates).
- ALM to assess future solvency.