M_F102_With Profit Distributions

Question 1

WP vs WOP key differences

Answer 1

• Less inflation risk, but depends on distribution method.- Less risk of insurer insolvency as surplus can be retained to maintain solvency.
• Greater investment freedom may result in greater long term returns.
• Discretion insurer has may be viewed negatively by policyholder.
• Due to subjective bonus allocations, policyholder expectations need to be managed.

Question 2

What does WP mean

Answer 2

Contracts share in profits of company.

Question 3

Possible options to distribute profits to policyholders:

Answer 3

• Cash bonus
• Premium reduction
• Benefit increase

Question 4

What bonus distribution method is most common in SA?

Answer 4

Additions to benefits – we still follow UK because we studied through them largely.

Question 5

Which of the 3 ways of distributing surplus would the company normally prefer?

Answer 5

Cash – administratively burdensome and reduces assets

Reduce premium – reduces income to company

Whichever way is chosen will be defined in the articles of association (later on it states that increasing benefits is probably also more appropriate for policyholder because they wanted to save, so make sure that saving ends up to be an appropriate (inflation protected) amount at the end, rather than dishing out surplus throughout… but it all depends on the need

Question 6

Additions to Benefits Method

Answer 6

Profits distributed in relation to current contractual benefits.

Regular reversionary bonuses

• declared on a regular basis, typically annually.
• may be simple, compound or super-compound.

Special reversionary bonuses

• one-off special type of reversionary bonus.
• avoids creating policyholder expectations of higher regular bonuses.

Terminal bonuses

• determined when the insured event occurs.
• may be a % of reversionary bonuses or total claim amount.

Question 7

Regular reversionary bonuses

Answer 7

• declared on a regular basis, typically annually.

- may be simple, compound or super-compound.

Question 8

Special reversionary bonuses

Answer 8

• one-off special type of reversionary bonus.

- avoids creating policyholder expectations of higher regular bonuses.

Question 9

Terminal bonuses

Answer 9

• determined when the insured event occurs.

- may be a % of reversionary bonuses or total claim amount.

Question 10

Distribution Method Considerations

Answer 10

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 which may arise from

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

Question 11

Distribution Method Considerations

Answer 11

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

• 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.