Chapter 15 - SA Surplus Distribution System Requirements

Question 1

Describe horizontal equity:

Answer 1

Similar PHs should be treated equally

For W/P contracts, this is achieved if regard is taken of:
1. terms of their policies,
2. their duration
3. and their relevant pooled experience

Any rating factors taken into account when pricing the product will normally be used when pooling experience

Question 2

Describe vertical equity:

Answer 2

Where distinctions are made between different classes or rating factors, the effects of distinction are proportional to the differences.

Smoothing of payouts can be seen as an attempt to achieve vertical equity

Question 3

How Reasonable Benefit Expectation (RBE) can arise: (4)

Answer 3

1. PH will expect the relevant content given in the underlying policy contracts are adhered to
2. They are influenced by the office’s marketing and other literature. This may set out how the office intends to distribute surplus and may indicate the intended split between different types of bonuses and how they may be determined
3. Actual past practice will be expected to continue into the future
4. An office may be expected to conform to what other offices are doing in the market

Question 4

Requirements of the system for the distribution of surplus: (8)

Answer 4

1. PHs RBE will include some expectation as to the investment strategy underlying the determination of asset shares. Significant changes to this strategy should be avoided
2. System should be sustainable and not endanger the solvency and stability of the insurer
3. System should take account of regulation and industry requirements applicable at the time
4. System should form a consistent whole with actuarial bases of the premium scales, where appropriate, and the valuation of liabilities
5. System must be easily understood by sales and administration staff, and PHs
6. System should be capable of accurate implementation given computer resources available
7. Where there has been a transfer of policies between companies, the transferring documents typically contain safeguards for transferring policies. These requirements must be honoured when surplus is distributed
8. System should take into account any restrictions ito the IC’s Memorandum and Articles of Association