Chapter 9- With-profits Surplus Distribution

Question 1

Possible ways of distributing profits to with-profits policyholders

Answer 1

1. Cash refund
2. Reduction in premiums
3. Benefit increase

Question 2

Why is it desirable for an insurer to defer the distribution of surplus

Answer 2

By retaining surplus, you increase your current level of free assets. Therefore, you:
1. Reduce the risk of insolvency
2. Increase investment freedom
3. Longer-term trend of available bonuses (i.e., increase potential returns)

Question 3

Terminal distribution

Answer 3

All profits we retain from underpaying bonuses throughout the policy term, we pay back a big lump sum as an extra distribution

Question 4

Conventional addition to benefits approach

Answer 4

Bonuses added to each policy is defined in some proportion to benefits currently payable on a claim under that policy. The bonuses are calculated and then added to the contractual benefits payable under each contract

Question 5

Reversionary bonuses

Answer 5

Declared (added) to the benefit during the term of the policy, and once added become guaranteed (cannot be removed)

Question 6

Terminal bonuses

Answer 6

May be paid at claim date, but it’s amount is not guaranteed

Question 7

Regular reversionary bonuses

Answer 7

Reversionary bonuses that are decorated on a regular basis, usually each year, throughout the lifetime of the contract

Question 8

Special reversionary bonuses

Answer 8

A company might declare part or all of a reversionary bonus as a one-off, in addition to any regular reversionary bonus that it is giving

Question 9

An accumulating with-profits contract

Answer 9

A with-profits policy to which bonuses are added annually in relation to the premiums payable to date plus previously declared bonuses. A terminal bonus may be added when the policy becomes a claim on maturity, death, or surrender

Question 10

2 ways in which the unit part of a contract should operate

Answer 10

1. The price of units remains constant and the company allocates additional units to each contract
2. The price of units changes, usually daily. This increase is made up of a guaranteed and bonus part

Question 11

Difference between the unitised with- profits contracts and unit-linked contracts

Answer 11

1. Discretion the company has over bonuses granted
2. Discretion the company has over the amount payable on surrender
3. The assets chosen by who (i think)

Question 12

Difference between unitised and non unitised with-profits contracts

Answer 12

Presentation

Question 13

Difference between conventional with-profits and accumulating with-profits

Answer 13

1. Acc has an explicit link to premiums to date and benefit
2. Con: basic sum assured+bonus declared
   Acc: contributions+bonuses declared
3. Con has a higher level of guarantees since there is a basic sum assured
4. Con: surrender values determined in relation to asset shares
   Acc: surrender values based on stipulated surrender penalties +MVA

Question 14

Bonus distribution considerations

Answer 14

1. Consistent with PRE
2. Be equitable between different categories and generations of policyholders
3. Not interfere with the company’s new business plans, investment strategy and solvency