Ch 9: With-profits surplus distribution 1 Flashcards
List 3 forms in which profits can be distributed to with-profits policyholders (3)
- Cash bonus
- Addition to benefits
- Reduction of premiums
A combination of all 3 is also possible
Explain why the insurer and the with-profits policyholders may have differing views on deferral of distribution of profits to poliycholders
Insurer’s view (2)
With-profits policyholder’s view (2)
From insurer’s POV, deferral of distribution may be attractive because:
- increased probability of remaining solvent
- greater investment freedom ( future bonuses higher if earn higher returns)
With-profits policyholders may welcome the latter due to higher future bonuses, but possible disadvantage of deferral may be:
- uncertainty of not knowing how much deferred (terminal) distribution is going to be
What is it that forms part of the profits distributed? (2)
What split/factor is it important for us to consider when deciding on profits to distribute? (2)
Profits usually constitute
- Excess investment return on premiums paid over the guaranteed return
- Mortality/expense profit
- Usually less significant than investment profit, because
- long term mortality/expense experience can be more accurately predicted and
- premium basis can be based on more realistic forecast of future
- Usually less significant than investment profit, because
Important to consider split between
- profits distributed to shareholders vs profits distrbuted to policyholders
- may be regulation restricted/governed
Name 3 surplus distribution systems (3)
- Additions to benefits
- conventional with pofits
- accumulating with profits
- Revalorisation
- Contribution
List 3 types of conventional with profits bonuses (3)
- Regular reversionary bonuses
- Special reversionary bonuses
- Terminal bonuses
Define reversionary bonus (3)
- Declared during contract lifetime, payable at the same time as basic benefits
- Once declared, is attached to basic benefits and cannot be taken away
- Can be
- regular (usually added annually), or
- special (added as ‘once off’ from time to time
Discuss the features of the reversionary conventional with profts bonus structures
Regular reversionary bonuses (1,4)
Special reversionary bonuses (1,3)
-
Regular reversionary bonuses
- bonus rates may change, unless investment/ecnonomic conditions change over time
- determining rates:
- gradual change over time
- consider bonus earning capacity: rate/rates of bonus block of contracts can sustain over future lifetime under certiain basis
- insurer prefer lower for lower guarantees
- policyholders prefer higher
- for their own financial planning
- greater protection against market falls, since declared bonuses gauranteed
- fewer subsidies between generations
-
Special reversionary bonuses
- doesn’t create expectations of similar increases in future
- one-off profits/special circumstances e.g. demutualisation, take-over, restructuring with profits fund
- increases gaurantee faster than if regular reversionary used
Describe the 3 types of regular reversionary bonus for conventional with-profits policies (3)
What can be said about level of profit deferral achieved by each? (1)
- Simple: bonus expressed as % of basic benefit
- Compound: bonuse expressed as a % of basic benefit plus any already attaching bonuses
- Super compound: bonus expressed in terms of two %s
- one applied to basic benefit
- second applied to any already attaching bonuses
- For given total amount of reversionary bonus at maturity date of an endowment, deferral of distribution is greatest with super compound, and least with simple bonus
Define terminal bonus (3)
State 2 ways in which TB can be specified for conventional with-profits policies (2)
What kind of profit sources are terminal bonuses usually used to distribute? (1)
What is the general/guiding principle used to determine the level of terminal bonus to distribute? (3)
Terminal bonus
- Additional amount payable when insured event occurs.
- Determined when insured event occurs.
- Generally more volatile as company has greater scope to increase if needed.
TB may be specified as:
- % of total attaching reversionary bonuses possibly varying with duration in force
- % of total claim amount (basic benefits plus attaching reversionary bonuses) before addition of terminal bonus
Profit source distributed by terminal bonus
- Usually used to distribute profits from more volatile sources e.g. capital gains on equity
Usually set as difference between asset share and guaranteed benefits
- because aim is to distribute profits to policyholders, allowing for shareholder’s interest and other aspects such as cost of capital.
- insurer tracks asset shares of sample policies to determine if affordable terminal bonus.
Explain what is meant by accumulating with-profits (AWP) contract (3)
What form of contract may AWP take? (2)
Comment on the guarantees we may find on AWP contracts (2)
What kind of death benefit may be payable on AWP contracts? (3)
Definition
- Bonuses are added in relation to premiums paid to date plus previously declared bonuses
- Premiums regular or single
- Terminal bonus may be added when policy becomes claim
Form of AWP contracts? May be unitised or non-unitised
Gurantees given on AWP
- Guarantees likely less than on CWP because bonuses are declared on current benefit rather than sum assured
- May be gauranteed minimum accumulation rate
Death benefits can be
- guaranteed sum assured
- return of premiums
- return of FV
What is the key difference between conventional with-profits and non-unitised accumulating with-profits contracts? (3)
- Relationship between each premium paid and addition to benefit to which it gives rise is:
- explicit for AWP contracts
- implicit (the sum assured) for CWP contracts
- Relationship between stated benefit and present value of the contract
- Level of guarantees also tends to be greater for CWP contract.
* Acc- lower level of guarantee because bonuses are declared on the “current benefit” rather than the sum assured
What are the key differences between unit-linked contracts and unitised accumulating with-profits contracts in terms of
- Unit price
- UL: set objectively by direct reference to value of underlying
- WP: set at discretion of company, so only indirect link with value of underlying assets
- Surrender values equal
- UL: bid price of allocated units less any surrender penalty specified in contract. Company has no discretion.
- AWP: bid price of allocated units plus terminal bonus (if appropriate) less any surrender penalty specified in contract less any MVR that company may have right to apply
Describe 2 basic ways in which the unit part of a unitised accumulating with-profits contract could operate
- Unit price remains constant e.g. R1.00 and bonuses are granted by allocating additional units
- company allocates additional units to each contract, usually annually at bonus declaration. these are made up of (possibly zero) guaranteed addition, and bonus addition, which could also be zero especially if there are guaranteed additions
- number of units is determined at discretion of company
- Bonuses are granted by increasing unit price, usually on a daily basis.
- increase is made up of (possibly zero) guaranteed part and bonus part.
- increase in UP is at discretion of company
Under both methods, terminal bonus coud be added when claim event happens
State 2 possible charging structures for unitised accumulating with-profits business and give 5 examples of possible charges
(1,5)
(1,1)
- Explicit charging e.g
- policy charges
- percentage allocation during an initial period
- bid/offer spread
- charge for risk benefits
- annual managment charge
- Implicit charging
- e.g. through choice of bonus rate
Define equity in the context of treatment of policyholders (3)
Under what circumstances/examples may questions of equity arise? (4)
- Equity means that all policyholders are treated fairly…
- …i.e. no groups of policyholders benefit at the expense of other groups.
- For proprietary company, equity also considered between policyholders and shareholders.
- Questions of equity arise in:
- distribution of surplus
- determination of variable charges
- determination of surrender values/alteration terms
- unit pricing
