Chapter 9 : With-profits surplus distribution (1)

Question 1

What are the key ideas for with-profits?

Answer 1

ECSEDED

Expectations (p.holder expectation on type and size of bonus)

Competition (bonus of competition, affect NB and withdrawal)

Smoothing of bonuses

Experience (bonuses may depend on expense, inv and mort experience)

Discretion

Equity of bonus

Defferal of surplus distribution

Question 2

What are the 4 types of with profit contracts?

Answer 2

Addition to benefits
1. Conventional with profits
2. Accumulating with profits

3. Revalorisation
4. Contribution method

Question 3

What are the 3 main ways that profit can be distributed?

Answer 3

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

Question 4

What are some bonus declaration considerations?

Answer 4

1. Bonus should be consistent with PRE
2. Equitable between different categories and generations of policyholders
3. Should not threaten the future business plans, investment strategy or solvency of the company
4. Investment returns (p/holders will compare with actual returns)
5. Guarantees need to be met
6. Profits from other sources (mortality, expenses) if it is a mutual.

Question 5

What are the impacts of the deferral of distribution of profits

Answer 5

1. Solvency- probability of remaining solvent is increased by reducing and delaying distribution of available profits
2. Investment freedom- less guarantees, higher long term bonuses
3. Marketability with new and existing p/holders- reputational damage, low new sales
4. Lower reserves - defer=lower guarantees = lower reserves

Question 6

What are some considerations when determining regular reversionary bonus rates?

Answer 6

1. Don’t vary too much with prior years. (PRE)
2. Reasonable affordability in future
3. Sustainability (bonus earning capacity)

Question 7

Terminal bonus

Answer 7

This is useful for distributing bonus from volatile sources e.g. equity

Question 8

What are the two ways of determining price of units for AWP?

Answer 8

1. Price remains constant, company allocate additional units
2. Instead of allocating additional units, the company changes the price of a unit on a daily basis

Question 9

Distinguishing factor between unitized with-profits and a unit-linked contracts

Answer 9

1. Unit linked doesn’t allow the company discretion over bonuses granted.
2. Unit-linked is linked a pool of underlying assets.
3. Surrender benefits payable on unit linked are the value of the units. On an AWP company has discretion and can implement a MVR of which the size is at their discretion.