F102 Summaries P2 Flashcards
the asset share of a policy is the accumulation of (+)
premiums
actual investment income
miscellaneous profits
the asset share of a policy requires the subtraction of (-)
commission and expenses
cost of all benefits in excess of asset share
tax - always refer to unrealised CGT and estimation errors
profit transfers to shareholders
cost of capital required to support new business strain
contribution tot he undistributed surplus of the with profits policyholder fund required to support the smoothing of bonuses and increase investment freedom
WP surplus distribution options
increasing ph benefits
immediate cash refund
reducing future premiums payable
WP surplus distribution key decisions for insurer
how much surplus it can afford to distribute
how it will divide surplus between different groups of policyholders
if it has shareholders, how it will split surplus between shareholders and policyholders - this may be controlled by legislation, established practice or the company’s own rules.
simple regular reversionary bonus
bonuses are declared as a percentage of the basic benefit only
compound regular reversionary bonus
bonuses are declared as a percentage of the basic bonus plus attaching bonuses
super compound regular reversionary bonus
bonuses are declared using different percentages of basic benefit and attaching bonuses
which reversionary bonus method defers surplus distribution the most, followed by which?
super compound
compound bonus
simple bonus
additions to benefits - AWP
can be unitised or non unitised
they operate superficially like a deposit account, with premiums being allocated to a policyholder account, which is then increased at a guaranteed rate of accumulation (can be 0) and by regular discretionary bonuses. a terminal bonus may be added at maturity, death or surrender.
A MVR may be applied on surrender.
for unitised, the regular bonus may be given as additional units with a fixed price or as an increase in the price of the units.
bonus distributions considerations
bonus distributions should:
- be in accord with policyholders reasonable expectations
- satisfy the requirements for equity between different groups of policyholders, including different generations
- not interfere with the company’s new business plans, investment strategy or solvency
revalorisation
bonuses under the revalorisation method are granted by increasing the reserves, benefits and premiums of WP contracts by a percentage e.g. r%
contribution method dividends
the contribution principle is that each policy receives a share of distributable surplus in proportion to its contribution to surplus. for this purpose, policies are classified into reasonably homogeneous groups.
Dividends may be paid as a cash sum (reduces IC assets), converted to additions to the benefits (increases IC liabilities) or used to reduce future premiums (reduces IC income)
how is PRE built up?
documentation issued by the LIC
the LIC’s actual past practice
the current practice in the life insurance market
main insurer distribution channels
independent intermediaries
tied agents
own sales force
direct marketing
independent intermediaries
select products for their clients from all of those available in the market
rewarded through commission from companies or fees from clients
tied agents
offer the products of only one life insurance company or of a small number of life insurance companies - the products are usually mutually exclusive
rewarded through commission
own sales force
usually employed by a particular company to sell its products directly to the public
rewarded by salary or commission or both
direct marketing
via mailshots, press advertising, over the phone or internet
the government may impose restrictions on LIC’s with the aim of protecting policyholders. Common restrictions include
- restriction on the types of contract that a company can offer
- restriction on the premium rates or charges for some types of contracts
- requirements relating to the terms and conditions of the contracts
- restrictions on the distribution channels, sales procedures and information provided at point of sale
- restrictions on the ability to underwrite - to avoid discrimination
- an indirect constraint on the amount of business that may be written via min reserving or solvency margin requirements
- restriction on the types of asset or the amount of any particular asset that the LIC may invest in for the purposes of demonstrating solvency.
common approaches to LIC taxation
- tax on the annual profits of the business
- tax payable on investment income less operating expenses of the LIC
in comparing the tax advantages of different products consider
- the taxation of the life insurers funds during the life of the contract
- the tax treatment of the eventual policy benefits paid
- the tax treatment of premiums paid, in particular whether the premiums are deductible front eh individuals taxable income in full, in part or not at all and whether there is a tax on the premium itself.
to assess overall risk, the LIC should use
model office projections typically incorporating stochastic modelling and sensitivity testing
risk of loss of the LIC has to be measured in terms of the effect it may have on the aims of the LIC, the aims are
maximise profits
maximise return on capital
risk must be assessed in relation to
the company’s capital and other resources
its impact on supervisory solvency
the cost of failng to meet any other legislative requirements