Ch9: With-profits surplus distribution

Question 1

Additions to benefits types

Answer 1

• regular reversionary bonuses
• special reversionary bonus
• terminal bonus

Question 2

The amount of regular reversionary bonus can be calculated in three ways

Answer 2

1. simple - the bonus is calculated as a percentage of the basic benefit under the contract
2. compound - the bonus is expressed as a percentage of the basic bonus and any already attaching bonuses
3. super-compound - the bonus is expressed in terms of two percentages: one applied to the basic benefit and a second applied to any already attaching bonuses. Where this is used, the second % is typically higher than the first

Question 3

Accumulating with-profits

Answer 3

• bonuses are added annually in relation to the premiums payable to date plus previously declared bonuses
• terminal bonus may be added when the policy becomes a claim on death, maturity or surrender

Question 4

Ways in which the unit part of the contract can operate (unitised version)

Answer 4

• the price of a unit remains constant. The company allocates additional units to each contract. These are made up of a guaranteed addition and a bonus addition (both can be zero).
• the company, instead of allocating additional units, changes the price of a unit, usually on a daily basis. The increase is made up of a guaranteed part and a bonus part

Question 5

Difference between unitised accumulating with profits and unit-linked

Answer 5

• surrender value - can deduct a MVR

Question 6

Unitised accumulating with profits charging

Answer 6

• policy charge
• percentage allocation during initial period
• a different percentage allocation after initial period
• bid-offer spread
• charge for risk benefits
• annual management charge
• implicitly through bonus rate with no explicit charges

Question 7

Bonus distribution considerations

Answer 7

Bonus distributions should:
- be in accord with policyholder’s reasonable expectations
- satisfy the requirement for equity between different groups of policyholders, including different generations
- not interfere with the company’s new business plan, investment strategy or solvency