Ch10: With-profits surplus distribution (2)

Question 1

Revalorisation method

Answer 1

The profit to be given to a particular contract is expressed as a % of that contract’s supervisory reserve. The benefit under the contract and the premium payable by the policyholder are then increased by the same amount.

Question 2

Advantages of revalorisation method

Answer 2

• simple to apply
• the method codifies exactly how a company should declare part of its profit as bonus to with-profits policyholders. Very little judgement is required and should be relatively cheap to administer
• (the exception is where policyholders take a share of insurance profit which may be spread over a period of time and judgement may be needed to determine how best this should be done)
• having a codified method generally protects policyholders from ungenerous life insurance companies
• by taking assets at book values, including appropriately smoothed writing-up (or down) adjustments, a smooth emergence of investment profit is usually achieved

Question 3

Disadvantages of revalorisation method

Answer 3

• the company has no discretion in its profit distribution
• the method tends to discourage equity investment. This is because there is no deferral of profit distribution. All investment losses would be borne by the company
• versions that do not share insurance profit with policyholders go against the principle of mutuality
• it is not very easy to explain to constant premium policyholders who see very small additions to their guaranteed profits early in the policy term

Question 4

Contribution method

Answer 4

Distributable surplus should be distributed among policies in the same proportion as those policies are judged to have contributed to surplus.

Question 5

Dividend given to a particular contract

Answer 5

= (V0 + P)(i-i’) + (q-q’)(S-V1) + [E(1+i)-E’(1+i’)]

Question 6

What factors limit the extent to which losses can be taken account for in bonus distributions

Answer 6

• the revalorisation method only distributes investment profits, expense or mortality losses must be borne by the company
• PRE
• guarantees under with profits contracts

Question 7

Factors that affect the choice of with-profits bonus distribution

Answer 7

• margins for future adverse experience
• business objectives (one likely to be maximisation of profit distribution for competitiveness)
• policyholder expectations