Chapter 9 - With-profits Surplus distribution

Question 1

What are the possible ways in which the insurer can distribute profits to with-profits policyholders

Answer 1

• Cash bonus
• Premium reduction
• Benefit increase

Question 2

From the point of the insurer, is the probability of remaining solvent increased by reducing and delaying the distribution of any available profits

Answer 2

YES

Question 3

Does giving a bonus as a benefit increase (to be paid out in the future) rather than paying it as immediate cash delay profit distribution

Answer 3

NO

Question 4

Under the additions to benefits approach of profit distribution, the initial guaranteed sum assured may be increased by bonuses of three kinds, What are they?

Answer 4

• Regular reversionary bonuses, added throughout the contract term
• A special reversionary bonus, added as a ‘one-off’ from time to time
• A terminal bonus , paid when the contract reaches maturity and possibly also on death or surrender

Question 5

What is regular reversionary bonuses

Answer 5

A regular reversionary bonus is a reversionary bonus that is declared on a regular basis, usually each year, throughout the lifetime of a contract.

Once declared it becomes attached to the basic benefits and is guaranteed

Question 6

In which ways can the regular reversionary bonuses be calculated

Answer 6

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
– second applied to any already attaching bonuses, with the second percentage typically higher than the first

Question 7

What is the bonus earning capacity

Answer 7

It is the rate, or rates, of bonuses that those contracts can sustain over their future lifetime, on the basis of a set of assumptions with regard to future experience

Question 8

What is special reversionary bonuses

Answer 8

A company may declare part or all of a reversionary bonus as a one-off ‘special’, ie in addition to any regular reversionary bonus that it is giving.

Question 9

What is the advantage of terminal bonuses

Answer 9

It defers the distribution of surplus until the end of the contract, and so slows down the build-up of guarantees under the contract

Question 10

How may terminal bonuses be specified

Answer 10

• A percentage - possibly varying by duration in force and original term of contract
• A percentage of the total claim amount - before addition of terminal bonus- with the percentage varying according to duration in force

Question 11

What is an accumulating with-profits contract

Answer 11

It is a with-profit policy to which bonuses are added annually in relation to the premiums payable to date plus previously declared bonuses. A terminal bonus may be added when the policy becomes a claim on maturity, death or surrender