Chapter 16 - Surplus Distribution Policy

Question 1

Sources of surplus: (6)

Answer 1

1. Investment surplus
2. Expense surplus
3. Mortality and other risk benefit surplus
4. Withdrawal surplus
5. Surplus from other contracts (for example, without profits contracts)
6. Mismatching surplus

Question 2

Definition of asset share:

Answer 2

The accumulation at a suitable investment return of premiums paid, less deductions, plus allocation of miscellaneous profits

Question 3

The degree to which declared bonus rate would follow returns actually achieved depends on: (4)

Answer 3

1. Office’s bonus declaration philosophy, want to declare volatile bonus from one year to next, or more stable bonus
2. The smount of BSR and to some extent the amount of free assets. High level of BSR allows insurer more freedom to deviate from market returns
3. Uderlying guarantees. The higher the guaranteed liability relative to the BSR and free assets, the more prudent the insurer will be in declaring bonuses
4. The investment mandate of the smooth bonus fund. More conservative mandates (such as bonds and cash) requires less smoothing

Question 4

Define “release of bonus loadings in the prm basis”:

Answer 4

It is a special type of investment surplus, which arises from a delibarate understatement of assumed investment returns in the premium basis to allow investment surplus to arise with reasonable certainty

Question 5

Typical deductions from asset share: (5)

Answer 5

1. Commissions and expenses, net of tax if applicable
2. Cost of providing life cover and any other benefits and options
3. Tax on income, taxable realised and unrealised gains, and profits if appropriate
4. Shareholders’ transfers
5. Capital charges, including charges for smoothing and/or guarantees

Question 6

Methods to determine the investment return to use in asset share calculations: (3)

Answer 6

1. Return on assets notionally allocated to with-profits business or to specific product lines within the with-profits portfolio
2. Notional returns calculated using a notional asset mix and returns in indices
3. The overall return on the non-linked assets in the fund

Question 7

How to allow for surrender profits on W/P business in the asset share calculation for W/P business: (2)

Answer 7

1. Asset shares would be accumulated allowing for actual asset surrender profits arising each year, broadly, the profits arising from a particular cohort are allocated to the remaining policies in that cohort
2. Allocate surrender profits by increasing the investment return. This way profts will be allocated over a wider range of policies and product types

Question 8

Asset share calculations for smoothed-bonus W/P business (3)

Answer 8

1. Retrospective accumulation using actual expenses
2. Retrospective accumulation using product charges
3. Shadow fund

Question 9

Uses of asset shares: (8)

Answer 9

1. Benchmark fot determining with-profits payouts
2. Used as a tool for consideration and quantification of TCF (when compared to benefits paid under WP policies)
3. Guide for determining maturity values
4. Guide for setting surrender values
5. Used to help the smoothing process for maturity values
6. Guide to the appropriate level of regular bonuses
7. Projected maturity and surrender values shown in marketing material are likely to be based on asset shares
8. Can be used in the reserving process
   BSR = asset share - contractual liability

Question 10

How does the shadow fund work when calculating the asset share for smoothed bonus business: (3)

Answer 10

1. Asset shares are calculated in a similar way as for the bid value of units within the unitised fund
2. i.e., the accumulation of prms, et of charges, at the relevant bonus rates
3. But instead of accumulating at the relevant bonus rates, thenasset shares accumulate at the actual investment returns earned on assets

Question 11

Too low BSR would affect: (3)

Answer 11

1. Solvency standing of the insurer
2. Investment strategy
3. Capacity to write new business