9. With-profits surplus distribution I Flashcards

1
Q

Why do we expect surpluses to arise under w/profits business?

A
  • Premiums based on conservative assumptions,
  • So company only has to achieve modest experience …
  • … to meet guaranteed benefits
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2
Q

Ways in which bonuses can be paid

A
  • Increase benefits
  • Immediate cash refund
  • Reduce premiums payable
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3
Q

Key decisions when distributing surplus

A
  • How much it can afford to distribute
  • Split of surplus between shareholders and policyholders (may be controlled by legislation, company rules or past practice)
  • How surplus will be divided amongst different groups of shareholders
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4
Q

Why is profit deferral desirable?

A
  • Reduces insolvency risk
  • Increases investment freedom and potential returns
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5
Q

Which customers may require increasing benefits to meet their needs

A
  • Those with regular premium savings product with lump sum benefit
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6
Q

Which customers may require cash to meet their needs

A
  • Those who are asset rich and income deficient
  • For whom single premium structure is suitable
  • Reg premium policies with cash bonuses could meet guaranteed monetary liabilities (e.g. loan repayments) at minimum cost
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7
Q

Two types of addition to benefits

A
  • Conventional with-profits
  • Accumulating with-profits
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8
Q

Conventional bonuses can be either

A
  • Reversionary
  • Terminal
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9
Q

Reversionary bonuses definition

A
  • Declared during policy term and once added are guaranteed
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10
Q

4 ways of declaring reversionary bonuses

A
  • Simple
  • Compound
  • Super-Compound
  • Special
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11
Q

Simple reversionary bonus

A

% of basic benefit only

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12
Q

Compound reversionary bonus

A

% of basic benefit plus attaching bonus

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13
Q

Super compounded reversionary bonus

A

Diff percentages of basic benefit and attaching bonus

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14
Q

Which reversionary bonus defers profit the most

A

Super compound&raquo_space; Compound&raquo_space; Simple

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15
Q

Special reversionary bonus definition

A

Once off bonus
- Presented that way to limit expectation of repeats

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16
Q

Terminal bonus definition

A

Paid at claim date but amount isn’t guaranteed

17
Q

Two ways of expressing terminal bonus

A
  • % of attaching bonus only, in which case, % will vary by duration in force and term of contract
  • % of basic benefit and attaching bonus, with which % will vary by duration in force
18
Q

Which conventional bonus method defers profit?

19
Q

Why are bonuses smoothed?

A

Protect ph from short-term fluctuation in returns which they’d experience if invested directly into investment markets

20
Q

Accumulating with-profits properties summary

A
  • Operate, superficially, like deposit account.
  • Premiums allocated to ph’s account which is
  • … increased at a guaranteed rate of acc (may be zero) and by regular discretionary bonuses
  • Terminal bonus may be added
  • MVR may be applied on surrender
  • May be unitised/non-unitised
  • Have explicit charging structure like unit-linked contract
21
Q

What does MVR stand for

A

Market Value Reduction

22
Q

What is an acumulating with-profits contract

A

Contract where bonuses are added annually in relation to premiums paid to date plus previously declared bonuses.
Terminal bonus may e added when policy becomes claim on maturity, death or surrender.

23
Q

Differences between non-unitised AWP and conventional with-profits contract with single premiums

A
  1. There is an explicit relationship between each premium paid and the increase in benefit to which it gives rise.
  2. Guarantees under conventional with-profits likely to be greater than many (but not all) gurantees on awp. (Company my specify min rate of accumulation- now rare)
24
Q

How might regular bonuses be applied on unitised bonus structures?

A
  • Increase units, price of unit unchanged
  • Increase price of unit
25
Why do we need MVR on unitised with-profits but not unit-linked ones?
* Investment return is smoothed on a unitised with profits and not directly linked to value of assets >> >> the unit value of a unitised with-profits policy even with a surrender penalty deducted may sometimes be above value of the underlying asset share. * The company would be vulnerale to surrenders and switches under these circumstances and would be at risk of investment selection by policyholders.
26
Charges on unitised with profits contracts
1. Policy charge 2. Percentage allocation during an initial period 3. Different percentage allocation after initial period 4. Bid-offer spread 5. Risk charge 6. Annual management charge Alt, charges an be taken implicitly through bonus rate.
27
Similarities between unit-linked and unitised AWP
Premiums: 1. Premiums paid into a unit fund, net of bid-offer spread. 2. In both cases premiums may be reviewable depending on the underlying performance of the assets (and therefore) unit funds. Charges: Charges deducted through cancellation of units. Surrender penalty: For both product designs there is a surrender penalty.
28
# Constant unit price; changing unit price; terminal bonus; surrenders; ch Differences between unit-linked and unitised AWP
* For unitised accumulating with-profit, one way to handle unit part is for unit price to remain constant and company allocates additional units to each contract, usually annually at bonus declaration o For unit linked, unit price changes usually daily * For unitised acc with profit where unit price changes, change in unit price usually comprises a guaranteed part and a “bonus” part (which is at company’s discretion) o For unit linked- change in unit price solely reflects change in net asset value per unit * For unitised accumulating with profit, may be a terminal bonus o Terminal bonuses won’t apply for unit-linked * For unit-linked; no discretion on surrender value benefit payable, bid value of units less surrender penalty o Unitised accumulating may have discretion over right to apply market-value reduction, and size of adjustments to be applied * For unitised accumulating with-profit, some charges could be taken implicitly through bonus rate, with no explicit charging structure o Unit linked will most likely have explicit charges and there may be a market value reduction for AWP (but not on the unit-linked) to reflect the realistic value of the asset share.
29
Bonus distribution considerations
* Be in accordance with PRE * Satisfy requirements for equity between different groups of policyholders, including different generations * Not interfere with company's new business plans, investment strategy or solvency
30
What are the limitations a company may face when trying to change how bonusses are distributed
* Legal requirements * PRE * Competitiom * Systems limitatioms * Managment limitations * Articles of association or constitution
31
How is asset share used in bonus distributions?
* Determining terminal bonus rates * Assessing equity of proposed distribution