Chapter 9 - With-profits surplus distribution Flashcards
List 3 forms in which profits can be distributed to with-profits policyholders
- Cash bonus
- Addition to benefits
- Reduction of premiums
Explain why the insurer and the with-profits policyholders may have differing views on deferral of distribution of profits to policyholders
From insurer’s point of view, deferral of distribution may be attractive because:
- increased probability of remaining solvent
- greater investment freedom ( future bonuses higher if earn higher returns)
With-profits policyholders may welcome second of these (higher future bonuses), but possible disadvantage of deferral may be:
- uncertainty of not knowing how much deferred (terminal) distribution is going to be
Why is benefit increase the preferred option to the other methods of profit distribution
Cash benefit and premium reduction may put the policyholders in a position of later finding out that future bonuses are reduced and the ultimate policy benefits are insufficient for the policyholder’s needs.
Where does the profit arise for the with-profit policies?
What split/factor is it important for us to consider when deciding on profits to distribute?
Profits usually constitute
- Excess investment return on premiums paid over the guaranteed return
- Mortality/expense profit
Usually less significant than investment profit, because
long term mortality/expense experience can be more accurately predicted and
premium basis can be based on more realistic forecast of future
Important to consider split between
- profits distributed to shareholders vs profits distributed to policyholders,
may be regulation restricted/governed
Name 3 surplus distribution systems
- Additions to benefits
+conventional with profits
+accumulating with profits - Revalorisation
- Contribution
Define reversionary bonus
Additions to benefits distribution system
- Declared during contract lifetime, payable at the same time as basic benefits
- Once declared, is attached to basic benefits and cannot be taken away
- Can be regular (usually added annually), or
special (added as ‘once off’ from time to time)
Describe the 3 types of regular reversionary bonus for conventional with-profits policies
Simple: bonus expressed as % of basic benefit
Compound: bonus expressed as a % of basic benefit plus any already attaching bonuses
Super compound: bonus expressed in terms of two %s
one applied to basic benefit
second applied to any already attaching bonuses
For given total amount of reversionary bonus at maturity date of an endowment, deferral of distribution is greatest with super compound, and least with simple bonus
Define terminal bonus
State 2 ways in which it can be speficied for conventional with-profits policies
Terminal bonus
- Additional amount payable when insured event occurs.
- Determined when insured event occurs.
- Generally more volatile as company has greater scope to increase if needed.
Terminal Bonus may be specified as:
% of total attaching reversionary bonuses possibly varying with duration in force
% of total claim amount (basic benefits plus attaching reversionary bonuses) before addition of terminal bonus
Explain what is meant by accumulating with-profits (AWP) contract
Bonuses are added in relation to premiums paid to date plus previously declared bonuses
Premiums regular or single
Terminal bonus may be added when policy becomes claim
May be unitised or non-unitised
What is the key difference between conventional with-profits and non-unitised accumulating with-profits contracts?
Relationship between each premium paid and addition to benefit to which it gives rise is:
+Explicit for AWP contracts
+Implicit (the sum assured) for CWP contracts
Level of guarantees also tends to be greater for CWP contract.
What are the key differences between unit-linked contracts and unitised accumulating with-profits contracts
Unit price
UL: set objectively by direct reference to value of underlying
WP: set at discretion of company, so only indirect link with value of underlying assets
Surrender values equal
UL: bid price of allocated units less any surrender penalty specified in contract. Company has no discretion.
AWP: bid price of allocated units plus terminal bonus (if appropriate) less any surrender penalty specified in contract less any MVR that company may have right to apply
Describe 2 basic ways in which the unit part of a unitised accumulating with-profits contract could operate
- Unit price remains constant e.g. R1.00 and bonuses are granted by allocating additional unitscompany allocates additional units to each contract, usually annually at bonus declaration. these are made up of (possibly zero) guaranteed addition, and bonus addition, which could also be zero especially if there are guaranteed additions
number of units is determined at discretion of company - Bonuses are granted by increasing unit price, usually on a daily basis.
increase is made up of (possibly zero) guaranteed part and bonus part.
increase in UP is at discretion of company Under both methods, terminal bonus could be added when claim event happens
State 2 possible charging structures for unitised accumulating with-profits business and give 5 examples of possible charges
-
Explicit charging e.g
+policy administration charges
+percentage allocation during an initial period
+bid/offer spread
+charge for risk benefits
+annual management charge -
Implicit charging
e.g. charges could be taken implicitly through bonus rates
Five considerations in bonus making decisions
- Policyholder Reasonable Expectations
- Equity (fairness) between different generations of policyholders as well as between shareholders and policyholders
- Avoiding threating future business plan, investment strategy and current solvency position
- Asset Shares
- Competitive Position and Industry Practice
What are the 3 “additions to benefit” bonus types
- Regular reversionary - declared thorughout the lifetime of policy
- Special reversionary
- terminal
