Chapter 15- South African Surplus Distribution Requirements

Question 1

outline the considerations regarding equity for both with and without profit contracts? (5)

Answer 1

• The main requirement of a surplus distribution system is that it should be equitable (fair or just)

• If the policy is not with-profit contract governed by principle and practices of financial management (PPFM) the equity will be met if the contractual terms of the policy and followed

• Equity is more complex when discretion is given to the board of the company who are advised by the actuary

• Actuaries needs to ensure that the interest of all parties (policyholders and shareholders) are considered and are appropriately balanced

• The actuary also needs to consider if the discrimination is fair and justified

Question 2

Outline horizontal equity considerations in surplus distribution? (3)

Answer 2

• This means that similar policyholders should be treated fairly (required by the LTIA)

• Policyholders with similar policy terms, policy durations and rating factors will be grouped together for the purpose of bonus allocations

• The policy regarding which experience is pooled and how surplus is allocated needs to be approved by the board and should not be changed without good reason

Question 3

Outline vertical equity considerations in surplus distribution? (2)

Answer 3

• Vertical equity means that where there are distinctions in allocations between classes of polices the effect of distinction are proportional to the differences

• The smoothing of pay-outs may be seen as an attempt to achieve vertical equity as they try not to distinguish between similar classes of policyholders over time (think about this)

Question 4

outline how policyholder reasonable expectations influence surplus distribution? (4)

Answer 4

• The south African courts have accepted that equity is maintained of policyholder’s reasonable benefit expectations are maintained

• The RBE’s have also been incorporated into SAP 104 as well as APN 106

• RBEs can effective arise in the following ways:
o Relevant content in the policy contract
o Influenced by marketing and other literature e.g. bonus distribution philosophy
o Past practice regarding bonus distributions
o Market practice

• Actuarial fairness means that each policyholder should receive the surplus earned by his/her policy and the earned asset share should be paid out at maturity

Question 5

outline financial and practical issues regarding surplus allocation? (8)

Answer 5

• Policyholder reasonable expectations will include some expectations regarding the investment strategy underlying asset share

• The system should be sustainable and not endanger the solvency of the company

• The system should take into account both regulatory and industry requirements including keeping consistent with principles and practices of financial management

• Consistent with basis in premium calculations and liabilities

• Easily understood by sales people, administration staff and policyholders

• Capable of accurate implementation (simplicity)

• Transferred policies usually contain safeguards such that surplus distribution is honoured

• Restriction in memorandum and article’s of association