Chapter 9 - With-profits Surplus distribution Flashcards
What are the possible ways in which the insurer can distribute profits to with-profits policyholders
- Cash bonus
- Premium reduction
- Benefit increase
From the point of the insurer, is the probability of remaining solvent increased by reducing and delaying the distribution of any available profits
YES
Does giving a bonus as a benefit increase (to be paid out in the future) rather than paying it as immediate cash delay profit distribution
NO
Under the additions to benefits approach of profit distribution, the initial guaranteed sum assured may be increased by bonuses of three kinds, What are they?
- Regular reversionary bonuses, added throughout the contract term
- A special reversionary bonus, added as a ‘one-off’ from time to time
- A terminal bonus , paid when the contract reaches maturity and possibly also on death or surrender
What is regular reversionary bonuses
A regular reversionary bonus is a reversionary bonus that is declared on a regular basis, usually each year, throughout the lifetime of a contract.
Once declared it becomes attached to the basic benefits and is guaranteed
In which ways can the regular reversionary bonuses be calculated
Simple - the bonus is expressed as a percentage of the basic benefit under the contract
Compound - the bonus is expressed as a percentage of the basic benefit plus any already attaching bonuses
Super compound - the bonus is expressed in terms of two percentages:
– one applied to the basic benefit
– second applied to any already attaching bonuses, with the second percentage typically higher than the first
What is the bonus earning capacity
It is the rate, or rates, of bonuses that those contracts can sustain over their future lifetime, on the basis of a set of assumptions with regard to future experience
What is special reversionary bonuses
A company may declare part or all of a reversionary bonus as a one-off ‘special’, ie in addition to any regular reversionary bonus that it is giving.
What is the advantage of terminal bonuses
It defers the distribution of surplus until the end of the contract, and so slows down the build-up of guarantees under the contract
How may terminal bonuses be specified
- A percentage - possibly varying by duration in force and original term of contract
- A percentage of the total claim amount - before addition of terminal bonus- with the percentage varying according to duration in force
What is an accumulating with-profits contract
It is a with-profit 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
What is the difference between Conventional with-profits contract and Accumulating with profits contract
For conventional with-profits contract, there is no immediate obvious relationship between the stated benefit and any present value of the policy.
For Accumulating with-profits contract, the individual’s with-profits account starts at zero and is increased (broadly) by the amount of the premiums paid and by bonuses
How could Unitised accumulating with profits operate?
- The price of a unit remains constant. The company allocates additional units to each contract, usually annually at the bonus declaration. These are made up of a guaranteed ‘addition’ and a ‘bonus’ addition
- The company, instead of adding additional units, changes the price of a unit, usually on a daily basis. The increase is made up of a guaranteed part and a bonus part
Why would an MVA be needed on a unitised with-profits contract but not on a unit-linked one
An MVA is needed because the investment return is smoothed on a unitised with-profits contract rather than link directly to the value of assets. Which means that the value of a unitised with-profits policy, even with a surrender penealty deducted, may at times be above the value of the underlying asset share
