Flashcards in WP Management - Surplus Distribution Policy Deck (19):
What is the UK distribution policy?
Additions to benefits method
What are the different ways to do additions to benefits?
When might RB's be taken away?
When an RB is declared does it increase asset shares?
No, it increases guarantees, hence cost of guarantees will increase
Why is declaring special RB instead of regular RB good? Why is it bad?
No PRE involved
Impact on free assets heavier as unlikely to have been anticipated in reserves (by definition)
Why is declaring TB over RB good for everyone?
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
Why would declaring all TB's probably not be so good?
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
New style post-Sandler with-profits in 8 points
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
What are the sources of surplus in WP fund?
surplus from other contracts
release of any bonus loadings in premiums
*some may be nagative (Strain)
How might different sources of surplus be distributed?
Ones which are regular go to RB (release of bonus loadings)
Irregular or volatile go to TB (inv. return on equities/non-par surplus)
Why would declaring more RB be better for shareholder transfers?
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
What are the 2 reasons to smooth bonus rates?
1. Smooth experience fluctuations between pollicyholders
2. Limit change in payouts over time in accordance with PRE in PPFM
what are the factors affecting degree of smoothing?
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
What are the main investigations done to come up with bonuses?
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
What will form the base of any distribution decision?
Any pre-existing policy giving levels and balance between RB and TB
When might it be decided not to change the bonuses year on year?
1. Investigations show continuing distribution policy won't cause problems
2. The policy is supportable, equitable and meets financial objectives
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?
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
What are the main regulatory requirements for a WP surplus distribution system?
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