Chapter 15: South Africna distribution systems requirements

Question 1

1. EQUITY

Question 2

Equity:

The main requirement of a surplus distribution system:

Answer 2

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

Question 3

Horizontal equity:

Answer 3

• Horizontal equity means that similar policyholders should be treated equally.
• Groups of with-profits policyholders are appropriately and equitably distinguished in terms of the allocation of profits if regard is taken of the terms of their policies, their duration and their relevant pooled experience.

Question 4

Vertical equity:

Answer 4

Vertical equity means that where distinctions are made between different classes, then the effects of the distinction are proportional to the differences.

Question 5

2. REASONABLE BENEFIT EXPECTATIONS (RBEs)

Question 6

Reasonable benefit expectations (RBEs):

RBEs can effectively arise in four main ways: (4)

Answer 6

1. relevant content given in the underlying policy contracts.
2. marketing and other literature about surplus distribution.
3. actual past practice.
4. market practice.

Question 7

3. FINANCIAL AND PRACTICAL ISSUES

Question 8

Surplus distribution systems requirements: (8)

Answer 8

1. Policyholders’ RBEs will include some expectation as to the investment strategy underlying the determination of asset shares. Significant changes to this strategy should be avoided.
2. The system should be sustainable and not endanger the solvency and stability of the company.
3. The system should take into account any regulatory and industry requirements applicable at the time. e.g. the system should be consistent with the PPFM documented for the products concerned.
4. The system should form a consistent whole with the actuarial bases of the premium scales, where appropriate, and the valuation of liabilities.
5. The system must be easily understood by sales and administration staff, and most importantly, by policyholders.
6. The system should be capable of accurate implementation, given the 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 the surplus is distributed.
8. The system should take into account any restrictions in terms of the insurance company’s Memorandum and Articles of Association.