Chapter 10 : With-profits surplus distribution (2)

Question 1

Describe the revalorisation method

Answer 1

Bonuses under the revalorisation method are granted by increasing the reserves, benefits and premiums of with-profit contracts by a certain percentage.

Hi proportion of savings profit (inv surplus) goes to p/holders but insurance profit goes to s/holders

Question 2

Under the revalorization method which 3 thing increase by the given rate?

Answer 2

1. Reserves
2. Benefits
3. Premiums

Question 3

What is the formula to calculate r

Answer 3

r = k (i’’ - i)

k= proportion for p/holders
i’‘=actual return
i= expected return

Question 4

What are the key ideas for revalorization

Answer 4

ECSEDED

Expectation
Competition
Smoothing
Discretion
Experience
Deferral

Question 5

What is the contribution method?

Answer 5

Distributable surplus is distributed among the policies in the same proportion as those policies are judged to have contributed to the surplus

Question 6

What 3 items of experience are included in the contribution method?

Answer 6

1. Mortality
2. Expenses
3. Investment

Question 7

What is the formula for the dividend under the contribution method?

Answer 7

dividend = (V0 + P)(i’’ - i) + (q - q’’)(S -V1) +[ È(1+ i) - E(1+ i’’)]

(V0 + P)(i’’ - i) - investment margin on reserve & premium

(q - q’’)(S -V1) mortality margin on sum assure

[ È(1+ i) - E’‘(1+ i’’)] actual vs expected expenses

Question 8

How is the dividend paid out under the contribution method?

Answer 8

1. Cash immediately
2. Can be used to buy more benefits (addition to beneftis)

Question 9

What are the key ideas for the contribution method?

Answer 9

ECSEDED

Expectations - PRE on form of dividends

Competition- dividends and payouts

Smoothing - Some smoothing

Experience - interest, mort and expenses

Discretion -they have some discretion, formula limits discretion

Equity- dividend calculate among homogenous groups for equity and fairness

Defferal - it allows for defferal for terminal bonuses, the rest is for regular dividend. It can be used witho

Question 10

What are the advantages of the revalorisation method?

Answer 10

1. Simple to apply
2. Uses a formula, very little jusgement
3. Formula saves p/holders from ungenerous insurers
   4.By taking assets at book values, a smooth emergence of investment profit is achieved

Question 11

What are the disadvantages of the revalorisation method?

Answer 11

1. The company has no discretion in the profit distribution
   2.Method discourages equity investment. Due to inability to defer profit, inv risk bourne by insurer.
2. Versions that don’t share insurance profit go against mutuality
3. Not easy to explain to policyholder with constant premiums