15 Surplus distribution system

Answer 1

Equity
Ph reasonable benefit expectations (RBEs)
Financial and practical issues

Answer 2

Main req for surplus distribution
Non-profit or no discretion in contracts&raquo_space; fulfilling contract considered equitable
Board uses actuary’s advice

Answer 3

Stakeholder interests
Horizontal and vertical equity, i.e.
As per constitution- any factors used to discriminate between groups must be “reasonable”, i.e., ….
… factors can’t be arbitrary and where designated factors are applied, discrimination must be justifiable.
SA insurance context: commercially necessary to avoid anti-selection

Answer 4

Defn: similar ph must be treated =ly
For w/p, can group by:
Term
Duration
Relevant pooled experience (rating factors)

Answer 5

Promotion of Equality and Prevention of Unfair Discrimination Act
Consideration to be taken when determining how to pool experience
If allowed to discriminate at inception&raquo_space; can discriminate at bonus distribution
Can use rating factors at inception
Need board approval before changing how experience pooled and bonuses distributed

Answer 6

E.g., practice to distribute qx improvements by applying uniform reduction to death strain when calc profit
During AIDS times, may have felt it appropriate to allocate AIDS losses to ages where qx higher
Potential legal issues for unfair discrimination
Would have to show that discrimination based on age wasn’t statistically justifiable but now is

Answer 7

Defn: Where distinctions are made between diff classes/rating factors, effects of distinction must be proportional to diffs
E.g. profit smoothing

Answer 8

If RBE maintained then equity maintained acc to SA courts
RBE in APN 106 and SAP 104

Answer 9

Relevant content in policy contracts
Marketing and other lit.
May set out how intend to distribute surplus, intended split between diff types of bonuses and how they may be determined
Past practice
Competitors

Answer 10

Actuarial fairness: Equality of E(P) and E(P) net of expenses at inception AND when any change is made.
So, each ph must get share of surplus “earned” by policy and …
… EAS paid at surrender or maturity.
Seems unfair if surrendering or changing due to uncontrollable circumstances
PFA rules against levying of charges previously undisclosed
Reg 5 of LTIA has guidance on EAS calcs and minimum SVs

Answer 11

Issues from PFA ruling:
Exact determination of EAS depends partly on subjective allocation of overhead expenses&raquo_space; can create higher SV by changing allocation
Reducing marginal expense loadings introduces moral hazard (by actuary)
EAS calcs require pooling / smoothing of diff sources of p/l, actuaries may disagree on appropriate degree of smoothing inherent in RBEs

Answer 12

Insurer must ensure enough capital to meet obligations and sustain bonus payouts plus …
…the surplus distribution system must allow for flexibility to adapt to diff market conditions, s.t.,
Bonuses still fair across diff ph cohorts even during changing conditions

Answer 13

Ph RBEs include expectation of investment strat underlying EAS calcs. Must avoid significant changes to inv strategy.
Must be sustainable and not endanger solvency and stability of company (Section 46(1)c of LTIA)
System must account for any regulatory and industry requirements. E.g. system must be consistent with PPFM documented for products concerned
System must form consistent whole with actuarial bases of the premium scales where appropriate, and valuation of liabilities.
System must be easily understood by sales and admin staff and most NB, pj
System must be capable of accurate implementation, given computer resources available
Where transfer between cos, transferring docs typically have safeguards for transferring policies. These requirements must be honoured when surplus distributed.
System must account for any restrictions in terms of co’s Memorandum and Articles of Association.