Methods of Distributing Profits (8 – 10)

Question 1

Asset Share & Objectives (7)

Answer 1

Accumulation of past premiums less expenses & cost of cover at actual rate of return earned.

Main objectives:
1. Bonus declarations
2. Monitor fairness
3. Surrender values
4. Market Value Adjustment Factor
5. Policy alterations
6. Profit distribution

Question 2

Asset Share Components (7)

Answer 2

The asset share of a policy is the accumulation of

1. premiums,
2. investment income, and
3. miscellaneous profits

less

4. commission and expenses,
5. cost of all benefits in excess of asset share,
6. tax (tax on investment including any reserves made for future tax liabilities)
7. profit transfers to shareholders
8. cost of capital required to support new business strain, and
9. contribution to the undistributed surplus of the with-profits policyholder fund required to support smoothing of bonuses and increase investment freedom.

Question 3

Ways of Distribution Profits (3)

Answer 3

– cash bonus

– premium reduction

– benefit increase

Question 4

Prefer Benefit Increase Distribution (5)

Answer 4

– liquidity

– investment freedom

– ensure benefit is sufficient for need

– difficult to increase premium

– experience may change

Question 5

Limits to distribution of profits (6)

Answer 5

• legal
• PRE
• competition
• systems limit
• management limit
• articles of association

Question 6

Additions to benefits forms (2)

Answer 6

1. conventional
   – regular reversionary
   – special reversionary
   – terminal
2. accumulating with-profit

Question 7

Regular reversionary bonus calculations (3)

Answer 7

1. simple
2. compound
3. super-compound / two-tier bonus system

Question 8

Accumulating with-profits

Answer 8

Bonus added in relation to premiums payable to date + previous declared bonuses

Like a bank account

Question 9

Accumulating with-profits non-unitised

Answer 9

Non-unitised
Ft+1 = [Ft + Pt - ct] x ( 1 + bt)

Question 10

Accumulating with-profits unitised

Answer 10

smoothing bonuses

two ways
1. allocate units & unit price =
2. increase unit price

At discretion of insurer

Surrender: MVR

Question 11

Unitised with-profits VS Unit-linked

Answer 11

Unit
– price change = solely change in NAV per unit
– no discretion for surrender (bid – penalties)

Unitised
– guaranteed part and bonus part
– distribute profits as
> additional units (unit value =)
> increase unit value
– surrender: discretion over MVR & size

Question 12

Bonus declarations considerations (5)

Answer 12

– PRE (level + form)

– Equity

– Business plans

– Investment strategy

– Solvency

Question 13

Revalorisation

Answer 13

Increase benefit & premiums by same %
– profit/surplus: r% of the contract’s supervisory reserve.

The benefit under the contract and the premium payable by the policyholder are then increased by the amount.

Europe

Adv
- Simple & codified
- Protect PH

Disadv
- no discretion
- discourage equity investment

Question 14

Revalorisation savings distribution

Answer 14

r = (i’ – i) k

or

r = ki’ – i

Question 15

Contribution method

Answer 15

The contribution principle is that each policy receives a share of distributable surplus in proportion to its contribution to surplus.

Question 16

Contribution method formula

Answer 16

dividend = [V0 + P] (i’’ – i) + (q - q’’)[S – V1] + [E(1 + i) – E’‘(1+i’’)]

Question 17

Choice of with-profits bonus method

Answer 17

Prevailing custom
– legislation
– regulation

General management aims

• PRE
• margins for future adverse experience
• provision of capital

Question 18

Systems of bonus method (3)

Answer 18

1. Addition to benefits
2. Revalorisation
3. Contribution