22 Management of UK With Profit Funds

Question 1

List three main regulatory requirements for a UK life insurance company’s surplus distribution system. (3)

Answer 1

It should be:

1. Equitable.
2. Consistent with TCF obligations and PRE.
3. Consistent with the PPFM.

Question 2

Describe the main features of the new style with profits contract developed as a by-product of the Sandler type of stakeholder products. (6)

Answer 2

1. Unitised contracts with explicit charges and a smoothed investment fund.
2. The unit price may fall. The only guarantee, if any, is a mortality guarantee.
3. Investment returns credited to policies are smoothed.
4. The aim is for smoothing to be neutral over time.
5. The insurer will maintain a smoothing account and the method used to smooth will be disclosed.
6. If capital support is required for smoothing this can be charged for so long as policyholders are notified.

Question 3

List 10 additional considerations for management of a with-profits fund in run-off (over those that apply to a fund open to new business). (10)

Answer 3

1. Increased per-policy expenses.
2. Changed investment strategy.
3. Increased liquidity issues.
4. Changed persistency experience.
5. Changed tax position.
6. Decision to de-risk.
7. Possible conversion of with-profit policies to non-profit policies.
8. Run-off plan and policyholder communications.
9. Decisions about the distribution of the estate.
10. Treatment of any non-profit business written in the with-profit fund.

Question 4

State two factors that the pace at which the estate in a closed with profits fund needs to balance. (2)

Answer 4

1. Security - maintaining capital to protect against risk and support the SCR.
2. Risk of a tontine effect where a small number of remaining policyholders receive a disproportionately high share of the estate.

Question 5

What are the factors to consider regarding ensuring that an estate distribution is fair between different groups of policyholders. (4)

Answer 5

1. Whether certain groups have had asset shares charged with costs of smoothing or guarantees and whether these should be repaid first.
2. Whether the distribution should be weighted towards those with a longer duration in-force or those with a longer outstanding duration.
3. Whether policies with guarantees that are heavily in-the-money should benefit - have they already received their fair share?
4. How different types of contract should be dealt with.

Question 6

List 15 examples of management actions that insurance companies can apply in the management of with profits funds. (15)

Answer 6

Management actions can apply in relation to the:

1. Balance between reversionary and terminal bonuses.
2. The rate at which reversionary bonus rates or payouts are adjusted.
3. The degree of smoothing over time.
4. The degree of smoothing between groups of policyholders.
5. Investment strategy.
6. The proportion of asset share paid out on surrender.
7. The application of MVRs on UWP business.
8. Asset share calculation approaches.
9. The extent to which the cost of guarantees etc is charged to asset shares.
10. Changes to variable explicit charges on UWP business.
11. The level of with-profit new business.
12. The level of non-profit new business written into the with-profits fund.
13. Inherited estate distribution, including pace and how it is shared.
14. Capital injections.
15. Securitisation or sale of blocks of business.