Part 1

Question 1

1. Personal financial life cycle

Answer 1

16 -25

25-40

40-65

65

Question 2

Components of asset share

Answer 2

• Premiums
• Expenses incurred and commissions
• Cost of providing all benefits in excess of asset share
• Tax
• Transfer of profits to shareholder
• Surrender profits/losses vii.
• Profits on NP policies
• Costs of any capital required to support contracts in the early years, as the premiums and asset share will not be sufficient to provide this in early years
  
  • 1) Cost is deducted to reward for those who provided the capital
• Contribution of the free assets which in turn support the smoothing of the bonuses and the ability to exercise greater investment flexibility
• Returns from capital provided at later durations, to support other with-profit sales, may be added to the asset share

Question 3

1. Determining the asset share

Answer 3

1. The accumulation of premiums less deductions associated with the contract, all accumulations at the actual rate of return earned on investments
2. Policyholder’s share the experience with the insurer both profit and losses
   
   1. Usually receive this at maturity and should reflect asset share
   2. Includes a share of the company’s profit
      
      1. All accumulated at the actual rate of return on investments

Question 4

Types of with profit distribution that are “additions to benefit”

Answer 4

Additions to benefit: Conventional:

1. Regular revionary
2. Terminal
3. Special Accumulating with profits

Question 5

Types of with profit distribution that are not “additions to benefit”

Answer 5

• Revalorisation method
  
  • Premiums, reserves and benefit increase by the same proportion (r%) b. r% is the “savings” profit
    
    • This is investment surplus only
    • Some is given to policyholders rest is gone to shareholders iii. r% = k%(Ia% -IE%)
      
      • K is the proportion that is given to policyholder
      • Experience just depend on investment return
      • Mechanically the reserves are increased so that surplus
    • ii. Equity - some
    • 1) The formula is mostly applied on a “fund level”
    • Deferral 1) Usually a cap of 0
• Contribution method
  
  • Surplus should be distributed relative to the same proportion as those policies are judged to have contributed to surplus
  • Premiums do not increase
  • A range of formats of bonus
    
    • Dividend paid out as cash 1) Calculated from I%, q, expense
    • iReduce premiums
    • Increase benefits
  • Reversionary bonus mostly and some TB
  • Equity has the most groupings
    
    • Refer to the dividend formula
    • Split between different groups will be formula driven
  • Sources of bonus includes
    
    • Investment return
    • Mortality
    • Expenses

Question 6

UWP vs UL

Answer 6

1. Discretion
   
   1. UL, the unit price is linked directly to the investment performance of the assets in the unit fund
   2. There is very little discretion available to the company in determining the unit price
   3. In UWP, the benefits are related to the performance of the fund, but at the discretion of the company
   4. In particular, returns are likely to be smoothed b. Deferral
      
      1. There is no deferral of distribution of surplus with a UL contract. The unit price reflects the full extent of the movement in the underlying assets
      2. UWP have some deferral of distribution.
         
         1. Part of the investment performance is reflected in the regular bonus
         2. Part is added only at point of claim in the form of terminal bonus
            
            1. This is at the discretion of the company
2. Charging structure
   
   1. UL have explicit charges e.g. amc, policy fees
   2. UWP may have explicit charges
      
      1. They could have implicit charges and they could be taken through bonus rates
      2. Policyholders share investment surplus and expenses that arise under the contract
3. Operation of Unit fund
   
   1. UL, unit price change to reflect the performance of the fund UWP could
   2. In UWP
      
      1. Unit price could be constant and bonuses applied by allocating additional units
      2. Allocate bonus by increasing the unit price
      3. The bonus could be made up of guarantee part and non guarantee part
   3. Surrender benefits
      
      1. UL has no discretion as to the amount payable on surrender
      2. Normally the bid value of the units less any surrender penalty in the contract
      3. UWP the surrender value will usually ne defined in a similar, but the company may also have discretion to apply a G(MVR)

Question 7

Addition to benefit with profit

Answer 7

• RB Reversionary bonuses are guaranteed once they are declared, ie they form an addition to the guaranteed policy benefits and cannot be taken away provided premiums are paid.
• Reversionary bonus can either be regular (typically annual) or special, eg triggered by an unusual event such as a takeover or with-profits fund restructure.
• Reversionary bonuses are either:
  
  • simple, ie the bonus rate applies only to the basic sum assured .
  • compound, ie the bonus rate applies to the guaranteed benefits (basic sum assured plus previously declared reversionary bon us)
  • super-compound, ie two different bonus rates are applied, one to the basic sum assured and a second to the previously declared reversionary bonus. ln this case, the second bonus rate is typically higher than the first.
  • Terminal bonus is added at the point of claim. It is not guaranteed.

Question 8

If you are financially diffulty which WP bonus increase should you use

Answer 8

• The company should adopt a super-compound approach to regular bonuses.
• This is because a super-compound approach involves the most gradual build-up of guaranteed benefit, ie is the approach with the greatest deferral of distribution of surplus.
• This can be seen in the graph as the amount of guaranteed benefit is lowest with the supercompound approach for the majority of the policy term.
• This makes it the least capital intensive approach …
  
  • … which will be important for this company as it is not financially strong.

Question 9

Differences between contribution vs revalorisation

Answer 9

• Both the premium and benefit are increased under the revalorisation method…
• … whereas only the benefit is changed under the contribution method.
• The revalorisation method applies the bonus as a percentage of reserve…
• … whereas the contribution method pays a dividend in cash…
• … or it may be converted into the form of a paid-up benefit.
• Contribution method more equitable (due to grouping of data)
• A terminal bonus can be distributed under the contribution method.
• The contribution method therefore tends to have more flexibility in terms of when bonuses are distributed.
• Only surplus related to profits from assets are generally distributed to policyholders under the revalorisation method…
• … with “insurance profit” typically going to shareholders… … whereas all sources of profit are generally distributed under the contribution method…
• … including assets, mortality and expense profits
  *

Question 10

Revorlisation vs Contribution

Answer 10

• Both are trying to do the same thing
• Profit distribution profit In contribution method
  
  • the source includes investmenet return,
  • Mortliaty and expense
• Profit distribution profit In revalorisation system
  
  • the regular distributions are given as increases to the guaranteed benefit under the contract
• The contrinbution method payout profit through regular distribution or through terminal distribution.
• Under the contribution method, the regular distribution maybe given as a cash dividend to the policyholder or perhaps offset the premiums
• Dividend may also be converted into paid up like revalorisation bonus
• the contribution method future premiums do not increase
• Contribution method there is more specific focus on the different sources of profit than for revalorisation
• There is some smoothing of the amount of profit distributed each year under both systems though using slightly different mechnism
  
  • With the contribution method the company can exercise some descretion over how much to dsitribute each year
  • However, the split of profits between different groups of policyholders will be driven by a formula
  • Revarlorisation method uses a defned formula to distribute profits, with no discretion but smoothing can occur relative to the market returns by distributing book value profits
• With the contribution method only, any termiinal payment allows profit to be held back against adverse future experience
  
  • This makes it suitable to deal with volatiile sources of profit such as capital gains on equities
  • Part or all of the contingency margins could be released in the terminal payout In both systems,
  • The policyholders are grouped, there is a board aim to give back to policyholders in each group their share of profits arising
• In both system the policyholders are gourped in some way
  
  • there is a broad aim to give back to policyholders in each group their share of profits arising
  • In contribution there is a greater focus on distributing specific sources of profit to narrower groups than for revalorisation, even in relation just to investment profit.

Question 11

What is AWP

Answer 11

• Benefit is defined as current fund value of premiums
• this may be charged, in the form of deductions made from premiums, before the premiums are added to the fund
• the benefit fund will accumulate at some guarateed rate, which is often zero
• bonus interest will also be added regularly to teh benefit amount
• the amount of bonus interest are at the discretion of the company
• the amount of death beenfit will be the unit fund, possibility with an additional terinal bonus paid, again at the discreton fo the company
• as with unit linked policy, there may be a minium death beenfit that woudl be paid, if the nnormal death benefit was less than this at the time of death
• Charges maybe deduced from the benefit fund. these could be aby of the charges described for unit linked, and essentially operate in an identical way except for the way in whihc the accumulating fund beenfit is calculated
• the AWP structure may or may not be unitised
• If it is, then the bonus interest can be added as an increase to the unit price or as addiional units
• On surrender of an AWP policy, a surrender penalty may be deduced from the fund benefit to recover any initial expenses that have not been recouped by that time
• There may also be a market value reduction ie. a downward adjustment to teh value of the fund beenfit on surrender, to reflect the realistic asset share value