With Profits Flashcards
Definition of With-Profits
A with-profits policy is a policy where the policyholder has an entitlement to part or all of any future surplus that arises under the contract (or more widely to share in surplus arising within the with-profits fund).
The policy may be ‘conventional with profits’ or ‘accumulating with profits’.
What are the key considerations for a company when distributing surplus on WP policies?
– How much surplus it can afford to distribute
– If it has shareholders, how it will split surplus between s/h’s and p/h’s (legislation, company rules or established practices)
– How it will divide surplus between different groups of p/h’s
What are the different approaches to distributing surplus on WP products?
- Additions to benefits approach
- Contribution method approach
- Revalorisation method
What are the different forms of bonuses under the ATB method?
- Regular reversionary bonuses - added throughout the contract term
- Special reversionary bonuses - added as a one-off from time to time
- Terminal bonus - paid when the contract reaches maturity and possibly also on death or surrender.
Describe the “conventional additions to benefits” approach
- The C-ATB approach is the system of distributing profits to policyholders, using reversionary and terminal bonuses, in which the bonuses added to each policy is defined as some* proportion* to the benefits currently payable on a claim under that policy.
- The bonuses calculated are then added to the contractual benefits payable under each contract.
- Hence, the distributed profits are paid out along with the orginal sum assured when there is a contractual claim under the contract, for example at death or maturity.
Describe Regular Reversionary Bonuses
- A regular reversionary bonus is a reversionary bonus that is decleared on a regular bais, usually annually, throughout the lifetime of a contract.
- Once declared it becomes attached to the basic benefits and is guaranteed.
Describe three ways the amount of Reversionary bonuses can be calculated
- Simple
- The bonus is expressed as a percentage of the basic benefit under the contract. - Compound
- The bonus is expressed as a percentage of the basic benefit plus any already attaching bonuses - Super compound
- The bonus is expressed in terms of two percentages:
– one applied to the basic benefit and a second applied to any already attaching bonuses.
- The second percentage is typically higher than the first.
What is the bonus earning capacity under a C-ATB approach?
The bonus earning capacity of a block of contracts is the rate(s) of bonus that the contracts can sustain over their future lifetime, on the basis of a set of assumptions with regard to future experience.
Describe what special reversionary bonuses are
- Special reversionary bonuses are one-off reversionary bonuses a company may declare over lifetime of the contract.
- e.g. occur as the result of restructuring a with-profits fund.
- the intention of a special RB is to grant a one-off increase in benefits without creating an expectation that a similar increase will be granted in the future.
Describe terminal bonuses
- TBs are paid when the contract reaches maturity and possibly also on death or surrender.
- the amount of TB is determined when the insured event occurs.
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What are the advantages of TBs?
- it defers distribution of surplus until the end of the contract, and so slows down the build-up of guarantees under the contract.
- It is particularly useful for distributing profits that come from volatile sources such as capital gains on equity shares.
How is the terminal bonus amount determined?
- The amount of TB is equal to the remaining asset share.
- We do this the TB is set equal to the difference between the asset share and the benefits guaranteed to date at the policy maturity date (initial guaranteed plus RBs).
- The TB amount is specifed in two ways:
– A percentage of total attaching RBs, including any SBs. This may vary by DIF and original term of contract.
– A percentage of the total claim amount (before TB is added). This may vary according to DIF.
Describe what an accumulating with-profits contract is.
- An AWP contract is a with-profits policy to which bonuses are added annually in relation to the premiums payable to date plus previously declared bonuses.
- A TB may be added when the policy becomes a claim on maturity, death or surrender.
- The most common form of such contract is a “unitised with-profits” contract.
From Acted notes (C9pg327):
“An AWP contract looks more like a bank deposit account. The individual’s with profits account starts at zero and is increased (broadly) by the amount of the premiums paid and by bonuses (which are expressed as percentages of the value of the account).
This means that the values actually seen by the policyholder are in present value terms, and the policy can be described as having a readily identifiable current benefit.”
5.
What are the different ways the AWP can be presented?
- AWP contracts can be presented as (1) non-unitised or (2) unitised AWP.
- Non-unitised AWP contracts shows the p/h’s benefit amount as a “fund value” as it builds-up over time with premiums paid and surplus (bonuses) added.
- Unitised AWP contracts breaks down the fund value into units.
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Described a unitised AWP contract
- When the AWP contract is unitised, it looks and operates very much like a UL contract.
- There are two basic ways in which the unit part of the contract could operate. (FV = #units x unit price)
(1) The price of a unit remains constant. - The company allocates additional units to each contract, usually annually at bonus declaration.
- The number of bonus units is determined at the discretion of the company.
(2) Changing the price of a unit, usually on a daily basis. - The increase is made up of guaranteed part and a bonus part.
The difference between the two approaches is one of presentation. The first option looks like a WP contract and the second appraoch looks like a UL contract.
