Chapter 9 & 10 - With Profits Surplus Distribution

Question 1

3 logical ways in which profits can be distributed:

Answer 1

1. Cash bonus
2. Premium reduction
3. Benefit increase

Question 2

3 ways of calculating the amount of the regular reversionary bonus:

Answer 2

1. Simple (bonus expressed as % of basic benefit)
2. Compound (bonus expressed as % of basic benefit plus any already attaching bonuses)
3. Super compound (bonus expressed in terms of 2 %s. One applied to basic benefit and second applied to any already attaching bonuses)

Question 3

What is the bonus earning capacity of a block of contracts?

Answer 3

The rates of bonus those contracts can sustain over their future lifetime, on the basis of a set of assumptions with regard to future experience

Question 4

Major advantages of revalorisation method: (4)

Answer 4

1. Simple to apply
2. Method codifies exactly how company should declare part of its profits. Very little judgement is required, will be cheap to administer
3. Having codified method generally protects PH against ungenerous life insurance company
4. By taking assets to book value, including appropriately smoothed writing up or down adjustments, a smooth emergence of investment profit is usually achieved

Question 5

Disadvantages of revalorisation method: (4)

Answer 5

1. Company has no discretion in its profit distribution
2. Tends to discourage equity investment (profits are deferred, means that all investment losses borne by IC)
3. Versions that do not share insurance profit with PH go against principle of mutuality
4. Not easy to explain to PH with ‘constant prm policies’ who see very small additions to their guaranteed benefits early in policy term

Question 6

PH expectation with regards to bonus distribution may arise from: (3)

Answer 6

1. Documentation issued by IC
2. Company’s actual past practice
3. General practice in Life Insurance market

Question 7

Terminal bonus can be calculated as: (2)

Answer 7

1. A % (possibly varying by duration in force) of total attatching reversionary bonuses, including any special reversionary bonuses
2. A % of the total claim amount (before addition of terminal bonus) with the % varying according to duration in force