Chapter 16 (Surplus Distribution Policy) Flashcards
What does the PPFM have to explain
-nature and extent of discretion
-factors taken into account
-how underlying assets are invested
-when decision will be made to remove non-vested bonuses
Degree to which declared bonus rates would follow investment returns depends on
-office’s bonus declaration philosophy
-amount of BSR and FA
-the higher the level of guarantees relative to BSR and FA, the more prudent the insurer will be in declaring bonuses
-investment mandate of smooth bonus fund (more conservative requires less smoothing)
What do policyholders have reasonable benefit expectations about regarding bonuses
-investment strategy
-level of bonuses
-split between reversionary/terminal
What are the most common ways of allocating surplus between policyholders and shareholders
-90/10 method
-explicit charges (fees for expenses and profit)
-investment surplus only (PH receive all investment and bonus loading surplus)
Which basis determines the incidence of profit
Valuation basis
What is pooling
Subsidies between different individuals or classes of policyholders
What is smoothing
subsidies between different generations of policyholders
How is a suitable investment return chosen for convention WP AS
- returns on assets notionally allocated to WP business.
- notional returns calculated using a notional asset mix and returns on indices
- overall return on non-linked assets in the fund
expenses will have to be apportioned amongst acquisition, renewal and investment costs. How?
-acquisition costs will be percentage of new business premiums or first year commission
-renewal costs are expressed as amount per policy
-investment costs as a percetage of assets or as explicit deductions in assumed investment returns
What are the possible asset share calculation methods for SB WP
1.Retrospective accumulation using actual policy expenses
2.Retrospective accumulation using product charges
3.Shadow fund
How does modelling future experience help a life office in respect of bonuses?
Helps them make a decision regarding supportable bonuses, extent of smoothing and split between vested and non-vested bonuses
What should be considered in modelling future experience?
1) Relevant experience - assumptions
2) Supportability of projected bonus rates
-whether bonuses can be supported given
BE of future XP
-bonuses have to be consistent with inv
conditions and marketing lit
-results compared with EAS to consider
equity
-may lead to revision of premiums or new
series of bonuses for new business
3) Split between reversionary/terminal and
vested/non-vested
-split will depend on RBE w.r.t investment
policy, bonus history and % of vested
claims
-if comp decides to reduce bonuses, will
depend on PRE w.r.t such reduction, speed
and competition
4) Terminal bonuses
-reviewed when significant change in inv
conditions
-choose MP and compare L with EAS w/o
terminal bonus
-indicates scope for terminal bonus
5) Guarantees and options
6) Dynamic interaction between projection
assumptions
