WP Management - Surplus Distribution Policy

Question 1

What is the UK distribution policy?

Answer 1

Additions to benefits method

Question 2

What are the different ways to do additions to benefits?

Answer 2

Regular RB
Special RB
TB

Question 3

When might RB’s be taken away?

Answer 3

Surrender

Question 4

When an RB is declared does it increase asset shares?

Answer 4

No, it increases guarantees, hence cost of guarantees will increase

Question 5

Why is declaring special RB instead of regular RB good? Why is it bad?

Answer 5

No PRE involved

Impact on free assets heavier as unlikely to have been anticipated in reserves (by definition)

Question 6

Why is declaring TB over RB good for everyone?

Answer 6

When RB declared it increases guarantees
Which reduces investment freedom hence return
Whereas TB increases the freedom
It also allowed lower reserves and higher free assets

Question 7

Why would declaring all TB’s probably not be so good?

Answer 7

P/h won’t know benefits until final event
Increase vol in benefits vs. RB
Increased exposure to risk of lower equities/property on maturity unless very big smoothing process on TB

Question 8

New style post-Sandler with-profits in 8 points

Answer 8

1. lower capital req
2. based from stakeholder (transparent products)
3. allows unit price to fall
4. investment return wholly benefits policyholders
5. smoothed investment return approach disclosed
6. capital support can be charges to policyholders if notified
7. unites product
8. distribution through unit price and not bonuses

Question 9

What are the sources of surplus in WP fund?

Answer 9

investment return
expenses surplus
mortality surplus
withdrawals
surplus from other contracts
release of any bonus loadings in premiums
*some may be nagative (Strain)

Question 10

How might different sources of surplus be distributed?

Answer 10

Ones which are regular go to RB (release of bonus loadings)

Irregular or volatile go to TB (inv. return on equities/non-par surplus)

Question 11

Why would declaring more RB be better for shareholder transfers?

Answer 11

Because required return by shreholders usually exceeds that return on the undistributed surplus in WP fund.
So as time goes on, this amount gets wider and wider
So shareholders want it quick so they can invest however they want, not leave it to accumulate at a less risky rate

Question 12

What are the 2 reasons to smooth bonus rates?

Answer 12

1. Smooth experience fluctuations between pollicyholders

2. Limit change in payouts over time in accordance with PRE in PPFM

Question 13

what are the factors affecting degree of smoothing?

Answer 13

1. TCF
2. Surplus distribution method
3. Assets backing contracts (low volatility smooths bonuses naturally, but fixed interest isn’t totally desired) and amount of free assets
4. Smoothing policy
5. Large unexpected events like a lot of NB

Question 14

What are the main investigations done to come up with bonuses?

Answer 14

1. Experience vs. expected
2. Supportability of rates over remaining lifetime of business
3. TB’s under CWP
4. Accumulating WP
5. Effect of bonuses on future solvency of company

Question 15

What will form the base of any distribution decision?

Answer 15

Any pre-existing policy giving levels and balance between RB and TB

Question 16

When might it be decided not to change the bonuses year on year?

Answer 16

1. Investigations show continuing distribution policy won’t cause problems
2. The policy is supportable, equitable and meets financial objectives

Question 17

If there is no pre-existing distribution policy or the pre-existing one needs adjustment, how do we go about setting a suitable distribution policy?

Answer 17

1. Use trial bonus rates in investigations
2. IF adjustments need to be made then rerun until satisfactory bonus policy found
3. Solvency of company is paramount
4. Take into account PRE when adjusting a pre-existing policy, this may constrain change in terms of speed done and extent of change

Question 18

What are the main regulatory requirements for a WP surplus distribution system?

Answer 18

1. equitable
2. PPFM states TCF is payouts compared with unsmoothed asset share in a range
3. Consistent with TCF and PRE
4. Consistent with documentation/literature which may have had how intend to distribute surplus and the RB/TB policy
5. Past practice expected to continue
6. Conform to what other companies are doing
7. Consistent with PPFM

Question 19

What TCF aspects will affect distribution policy?

Answer 19

1. Expectation to at least maintain RB rates, except in adverse conditions
2. Assessment of whether equitable to give same RB rate to all policyholders