Chapter 10: With Profits Surplus Distribution 2

Question 1

Advantages of revalorisation:

Answer 1

• simple to apply
• codifies exactly how company should declare part of profit as bonus
o little judgement – cheap to administer
o exception – where PHs share in insurance profit or once off profits/losses
• codified method – protects PHs from ungenerous LI companies
• assets at book value with smoothed writing up/down => smooth emergence of investment profit

Question 2

Disadvantages of revalorisation:

Answer 2

Disadvantages:
• no discretion in profit dist (except one off costs)
• discourages equity investment
o no profit deferral
o all investment losses borne by company – too high insolvency risk
o problem of unrealised gains treatment
• versions that don’t share insurance profit go against principle of mutuality
• not easy to explain to PH with constant prems – small additions to g’teed benfs in early policy term

Question 3

Contribution principle

Answer 3

Distributable surplus should be distributed among policies in same proportion as those policies are judged to have contributed to surplus.

Question 4

PREs built up from (3)

Answer 4

•	Documentation issued by LI company
o	Marketing literature at time of sale
o	Projections of fund or eventual benf  
•	Company’s actual past practice 
o	Bonus dists in past few years
o	Have large surplus, declare same bonus – do not increase PRE
•	General practice of ins market
o	Bonuses other companies are declaring

Question 5

Failure to meet PRE (2)

Answer 5

• PH dissatisfaction

- failure of TCF