Chap6- Terminal Bonus

[deepansh]

It is mentioned that terminal bonus can be specified as "a %- possibly varying by duration in force and original term of the contract- of total attaching reversionary bonuses incl any special reversionary bonuses".

I understand that terminal bonus can vary by duration in force (because of change in asset share) but I don't gey how the original term of the policy will also impact Terminal bonus?

Can anyone please help?

Regards,
Deepansh

 

[mugono]

It is mentioned that terminal bonus can be specified as "a %- possibly varying by duration in force and original term of the contract- of total attaching reversionary bonuses incl any special reversionary bonuses".

I understand that terminal bonus can vary by duration in force (because of change in asset share) but I don't gey how the original term of the policy will also impact Terminal bonus?

Can anyone please help?

Regards,
Deepansh

Hi Deepansh,

An insurer may want to set terminal bonuses that vary by term. For e.g. a 30 year policy could have benefited from good investment growth over the period. This would support ‘high’ terminal bonus rates (as a % of the total payout amount). By contrast a 5 year policy - which has had less exposure to investment markets - may only be able to support lower terminal bonuses.

Terminal bonuses are typically set so that policyholders receive 100% of asset share on average. The term of the policy may be a consideration when deciding the proportion of a customer’s payout to meet via terminal bonuses.

Hope that helps.

 

[Adam]

Hi Deepansh,

An insurer may want to set terminal bonuses that vary by term. For e.g. a 30 year policy could have benefited from good investment growth over the period. This would support ‘high’ terminal bonus rates (as a % of the total payout amount). By contrast a 5 year policy - which has had less exposure to investment markets - may only be able to support lower terminal bonuses.

Terminal bonuses are typically set so that policyholders receive 100% of asset share on average. The term of the policy may be a consideration when deciding the proportion of a customer’s payout to meet via terminal bonuses.

Hope that helps.

Hi mugono,

Just two follow-up questions on TB.

• "The term of the policy may be a consideration when deciding the proportion of a customer’s payout to meet via terminal bonuses." Can you give a more specific example for this?
• it is said that "... TB can more readily facilitate the equitable treatment of policyholders. That is, the rates of terminal bonus can be set so as to maintain the desired degree of equity between different generations and types of contracts". Can i say that the reason that TB is a more readily tool to deliver equity is that insurers can change TB more easily? Also how TB varies according to type of contracts?

Thank you!

 

[Lindsay Smitherman]

"The term of the policy may be a consideration when deciding the proportion of a customer’s payout to meet via terminal bonuses." Can you give a more specific example for this?

For a 30 year term policy, the company might decide to target say 60% of the overall payout as TB. There is a long time over which to earn investment returns, and the company might wish to invest in higher risk assets (ie a high proportion of equities) in order to aim to gain higher returns over that long-term period. The higher TB cushion gives them more flexibility as the TB rate is not guaranteed until the point of claim.

For a 5 year term policy, the company might decide to target say 30% of the overall payout as TB. There is a much shorter time period over which exposure will be gained to investment markets, and the company may prefer to invest more in less volatile (and lower return) assets, so there is a greater emphasis on providing a guaranteed benefit amount.

[I have made these numbers up for the purposes of illustrating the principles - they aren't intended to represent true ratios!]

 

[Lindsay Smitherman]

• it is said that "... TB can more readily facilitate the equitable treatment of policyholders. That is, the rates of terminal bonus can be set so as to maintain the desired degree of equity between different generations and types of contracts". Can i say that the reason that TB is a more readily tool to deliver equity is that insurers can change TB more easily? Also how TB varies according to type of contracts?

We could think about 'equitable treatment' in this context as meaning how closely the amount paid out as a benefit to the policyholder relates to what that policyholder has contributed and earned under the policy (less what it has cost the insurance company to maintain that policy). The latter is represented by the asset share, so we can consider asset share as representing an indication of an 'equitable benefit amount'.

TB rates are broadly set to target the payment of asset share. Hence they help to ensure equitable treatment.

Different generations of policyholders will have experienced different periods of exposure to the investment markets, and this will be reflected in TB rates.

Companies will incur different levels of expense under different products. Different products might be invested in different asset mixes. Different products are likely to have different levels of death cover, and hence incur different costs of providing this cover. Different products could be subject to different tax treatments. Each of these impacts the asset share development, and hence the TB rates that would be determined using those asset shares.

Hope that helps.

 

[Adam]

We could think about 'equitable treatment' in this context as meaning how closely the amount paid out as a benefit to the policyholder relates to what that policyholder has contributed and earned under the policy (less what it has cost the insurance company to maintain that policy). The latter is represented by the asset share, so we can consider asset share as representing an indication of an 'equitable benefit amount'.

TB rates are broadly set to target the payment of asset share. Hence they help to ensure equitable treatment.

Different generations of policyholders will have experienced different periods of exposure to the investment markets, and this will be reflected in TB rates.

Companies will incur different levels of expense under different products. Different products might be invested in different asset mixes. Different products are likely to have different levels of death cover, and hence incur different costs of providing this cover. Different products could be subject to different tax treatments. Each of these impacts the asset share development, and hence the TB rates that would be determined using those asset shares.

Hope that helps.

Thank you for your detailed explanation, Lindsay.