Ch 9: With-profits surplus distribution

Question 1

3 ways how profits could be distributed to with-profits policyholders

Answer 1

• Cash bonus
• Premium reduction
• Benefit increase

Question 2

What is meant by deferring the distribution of profits?
Why would you do it

Answer 2

• By “delay” it is meant that the company is deffering its decision on how much is going to be paid out when the time comes to do so.
• Giving a benefit increase to be paid out on a future claim rather than paying a cash sum now, is NOT delaying profit distribution.
• Probability of remaining solvent is increased by reducing and delaying the distribution of any available profits
• This will allow greater investment freedom to some extent which may increase the long-term trend of avaliable bonuses

Question 3

Additions to benefits approach overview

Conventional with-profits

Answer 3

• Profits are distributed in direct relation to the current benefits under each contract
• Reversionary and terminal bonuses are defined as some proportion of benefits currently payable under that policy.
• Bonuses calculated are then added to the contractual benefits payable.

Question 4

Additions to benefits, benefits may be increased by bonuses of three kinds:

Answer 4

• Regular reversionary bonus, added through-out policy term
• Special reversionary bonus, once-off bonus from time to time
• Terminal bonus, calculated and paid when the contract reaches maturity and possibly also on death or surrender.

Question 5

Regular reversionary bonus can be calculated in three ways

Answer 5

• Simple: Bonus is expressed as a percentage of the basic initial benefit under the contract
• Compound: Bonus is expressed as a percentage of the basic benefit plus any already attaching bonuses
• Super-compound: Bonus is expressed in terms of two percentages - one applied to the basic initial benefit and a second applied to the already attaching bonuses. Second percentage is typically higher than the first

Question 6

Rank the extent of deferal of bonus for the three ways to calculate reversionary bonuses

Answer 6

• Super-compund method defers distribution of surplus the most and compound method more than the simple approach
• Defering the bonus under the contract keeps the guarantees lower, this in turn keeps the supervisory reserves lower.
• Super-compound thus the most capital efficient.

Question 7

Terminal bonus may be specified in number of ways:

Answer 7

• Aim is for terminal bonus to be equal to difference between asset share and benefits guaranteed to date. Could be done:
• As a percentage of total attaching reversionary bonuses. May be varying by duration in force and original term of contract
• As a percentage of total claim amount. Percentage will be varying according to duration in force

Question 8

Accumulating with-profits

Answer 8

• With-profits policy where bonuses are added regularly in relation to premiums payable to date plus previously declared bonuses. Terminal bonus may be added when the policy becomes a claim.
• Looks more like a bank deposit account and the value seen by the PH is in present value terms.
• Can be unitised with-profits or non-untised with-profits
• Bonuses are declared on “current benefit” rather than on sum assured

Question 9

Unitised accumulating with-profits - two ways in which unit part could operate

Answer 9

• Price of unit remains constant. Company allocated additional units to each contract, usually annually at bonus declaration. - made up of a guaranteed portion and a ‘bonus’ addition
• Company changes price of units instead of allocating additional units. Changes made on daily basis
• Bonuses are discretionary instead of linked to underlying assets
• Surrender value also discretionary through MVA (market value adjustment)