M_F102_With Profit Distributions 2

Question 1

Accumulating with-profits

Answer 1

• with-profits policy where bonuses are added annually on premiums paid to date plus previously declared bonuses. There may also be a terminal bonus payable.
• Works like a bank account, there is an explicit relationship between each premium and the additional benefit it gives rise to.
• typically unitised.
• guarantees likely to be lower than under conventional with-profits setup.
• may also be a guaranteed rate of accumulation (e.g. zero floor).
• if unitised, 2 options: allocate more units or change unit price.
• death benefit defined in contract (e.g. return of premiums).
• premiums may be single or monthly/annual recurring.

Question 2

Accumulating with-profits, unitised, 2 options

Answer 2

• if unitised, 2 options: allocate more units or change unit price.

Question 3

Differences WP unitised AWP compared to a ‘simple’ unit-linked contract

Answer 3

• insurer has discretion on bonus rates.
• unit linked contracts pay out bid price of units less a surrender penalty, whereas here a market value reduction (‘MVR’) may also apply.
• an MVR may also apply in the non-unitised version depending on the policy terms.
• the MVR allows the insurer to pay out a value closer to the policy asset share, e.g. if declared bonuses, in an attempt to smooth returns, were greater than actual returns.

Question 4

Revalorisation Method

Answer 4

Surplus expressed as a % of a contracts supervisory reserves. Benefits and future premiums payable are then increased by that percentage.

Question 5

Revalorisation Method, Source of profit is typically separated into 2 categories:

Answer 5

• a savings portion which arises from excess investment return. This is typically partly distributed using this method.
• an insurance profit which arises from experience being better than expected from sources other than investment performance. This is typically retained by the company for distribution to shareholders.

Question 6

Contribution Method

Answer 6

Dividend allocated to a contract calculated using a formula: Dividend = ( V0 + P ) ( i” - i ) (investment surplus) + ( q – q” ) ( S -V1 ) (mortality surplus) + [ E ( 1+ i ) - E”( 1+ i” ) ] (expense surplus)

• dividend paid out as cash or converted to a paid-up addition to the benefit.
• terminal benefit may be paid to bring benefit in line with asset share.

Question 7

Companies have some judgement on how much bonus to distribute, but limited by:

Answer 7

PRE formed by 
Past Practice, 
Regulation, 
Legislation, 
Competition, 
Systems limitations, 
Actuarial expertise eg cash bonus 

– declare now and it’s out
– RB becomes guarantee that you have to maintain for many years to come

Question 8

Distribution Method Considerations (summary)

Answer 8

Extent of margins for future adverse experience
- will determine how much surplus should be held back.

Business objectives of the company, e.g. higher bonuses could improve competitiveness.

Policyholder expectations

Management of free assets, which may arise from delaying profit distribution

Question 9

Policyholder expectations may arise from

Answer 9

• documentation from the company
• the company’s past practice
• general practice in the industry.

Question 10

Management of free assets WP considerations

Answer 10

• under the Additions to Benefits method greater deferral is achieved using super-compound reversionary bonuses and terminal bonuses.
• under the Revalorisation method, there is limited scope for profit deferral.
• under the Contributions method this will depend on the balance between the regular and final dividends.