9. With-profits surplus distribution I Flashcards
Why do we expect surpluses to arise under w/profits business?
- Premiums based on conservative assumptions,
- So company only has to achieve modest experience …
- … to meet guaranteed benefits
Ways in which bonuses can be paid
- Increase benefits
- Immediate cash refund
- Reduce premiums payable
Key decisions when distributing surplus
- 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
Why is profit deferral desirable?
- Reduces insolvency risk
- Increases investment freedom and potential returns
Which customers may require increasing benefits to meet their needs
- Those with regular premium savings product with lump sum benefit
Which customers may require cash to meet their needs
- 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
Two types of addition to benefits
- Conventional with-profits
- Accumulating with-profits
Conventional bonuses can be either
- Reversionary
- Terminal
Reversionary bonuses definition
- Declared during policy term and once added are guaranteed
4 ways of declaring reversionary bonuses
- Simple
- Compound
- Super-Compound
- Special
Simple reversionary bonus
% of basic benefit only
Compound reversionary bonus
% of basic benefit plus attaching bonus
Super compounded reversionary bonus
Diff percentages of basic benefit and attaching bonus
Which reversionary bonus defers profit the most
Super compound»_space; Compound»_space; Simple
Special reversionary bonus definition
Once off bonus
- Presented that way to limit expectation of repeats
Terminal bonus definition
Paid at claim date but amount isn’t guaranteed
Two ways of expressing terminal bonus
- % 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
Which conventional bonus method defers profit?
Terminal
Why are bonuses smoothed?
Protect ph from short-term fluctuation in returns which they’d experience if invested directly into investment markets
Accumulating with-profits properties summary
- 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
What does MVR stand for
Market Value Reduction
What is an acumulating with-profits contract
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.
Differences between non-unitised AWP and conventional with-profits contract with single premiums
- There is an explicit relationship between each premium paid and the increase in benefit to which it gives rise.
- 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)
How might regular bonuses be applied on unitised bonus structures?
- Increase units, price of unit unchanged
- Increase price of unit
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»_space;
» 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.
Charges on unitised with profits contracts
- Policy charge
- Percentage allocation during an initial period
- Different percentage allocation after initial period
- Bid-offer spread
- Risk charge
- Annual management charge
Alt, charges an be taken implicitly through bonus rate.
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.
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.
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
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
How is asset share used in bonus distributions?
- Determining terminal bonus rates
- Assessing equity of proposed distribution
