With Profits

Question 1

Define Horizontal Equity

Answer 1

• Similar Policyholders are treated equally
• Groups of with profits policyholders are appropriately and equitably distinguished in terms of allocation of profits with regards to duration and relevant pooled experience

Question 2

Define Vertical Equity

Answer 2

• Where distinctions are made between different classes or rating factors, the effects are proportional to the difference. Smoothing is an attempt to achieve vertical equity

Question 3

Define Reasonable Benefit Expectations

Answer 3

• Contractual benefits
• Marketing literature
• Past Practice
• Competitors

Question 4

Describe the management of the BSR

Answer 4

• measure of financial soundness of with-profits portfolio, if positive bonuses were under-declared compared to distributable surplus. If negative, over declared
• Smoothing could lead to contributions/ subsidies to/from BSR
• If BSR becomes too negative, a transfer in the form of a loan from Free Assets would be needed
• No transfers are permitted from BSR, unless it is to repay loan.
• BSR should not grow too large, unfair to existing policyholders
• If it becomes too small, hinders ability to write new business. Its use to subsidize bonuses may create unreasonable expectations

Question 5

Describe the modelling process

Answer 5

• The relevant experience e.g. expense, mortality to determine bases used in model
• Test if projected rates can be supported given best estimate of experience, check if consistent with PPFM and PRE, compare to asset share to decide equity.
 Unsupportable bonuses:
o revise premium rates,
o change bonus for new business,
o gradually adjust rates until they run into supportable rates
• consider interaction among projection assumptions

Question 6

Describe the Sources of Surplus

Answer 6

Surplus emerges if the actual experience is more favorable than the pricing basis for conventional. The rate of emergence depends on the valuation basis.
For Smooth bonus difference between charges and expenses
• Investment
- Any additional surplus over investment return assumed in premium for conventional.
- For smooth bonus, little investment is assumed, so most can be distributed as surplus/
- Capital appreciation distributed by terminal
• Expense
• Mortality/Risk
• Withdrawal
- Loss from early withdrawals, insufficient to recoup initial expenses.
- Surplus from MVA
• Surplus from other contracts
• Mismatching

Question 7

Describe the MVA

Answer 7

• Smoothing can result in a policy value greater than the asset share especially after a market downturn, can lead to anti-selection.
• MVA applied to protect interests of other policyholders
• Not applied to deaths or normal maturities.

Question 8

Describe the Group Life conditions

Answer 8

• MVA not applied to individual withdrawal (Still applied to group withdrawal), due to reduced risk of anti-selection. Individuals only withdraw on termination of employment, disability and death
• Bonus rates follow investment experience more closely
• Smoothing is applied in a Scheme itself but rarely between schemes.
• Most follow smoothed bonus, reversionary is rare
• Explicit charges made for admin, cost per member lower due to bulk admin.
• Hedged investment strategies more common.

Question 9

Describe the capital Charges

Answer 9

• SA legislation requires a minimum amount of capital to be held to absorb fluctuations of actuarial liabilities relative to asset shares. Also to pursue more risky investment, although derivatives can be used, but more costly than capital
• Cost of capital charge may be levied to compensate shareholders
• N/A to mutual office