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Equitability of Contribution Method vs CWP

S

Studystuff

Member
Hi,

I was hoping a tutor may be able to clarify my understanding of this point.

I have learned through SP2/SA2 and tutorials that CWP Terminal Bonuses are only "broadly equitable" (sometimes referred to as "smoothing across policies).. I have always interpreted this as when TB rates are set, they are set so as to pay out the difference between (Aggregate AS - (currently gauranteed SA + previous bonuses)) for the maturing cohort of policies. However TB rates are likely only set at a product level and maybe duration in force. So while the company still pays out the right amount overall, this isnt "equitably" given amongst different granual cohorts (eg split by age, gender, term, policy type, health status etc etc)

However, the contribution method takes this a step further by subdividing experience into granular homogenous groups when setting the dividen amount, is that correct?
 
Studystuff said:
Hi,

I was hoping a tutor may be able to clarify my understanding of this point.

I have learned through SP2/SA2 and tutorials that CWP Terminal Bonuses are only "broadly equitable" (sometimes referred to as "smoothing across policies).. I have always interpreted this as when TB rates are set, they are set so as to pay out the difference between (Aggregate AS - (currently gauranteed SA + previous bonuses)) for the maturing cohort of policies. However TB rates are likely only set at a product level and maybe duration in force. So while the company still pays out the right amount overall, this isnt "equitably" given amongst different granual cohorts (eg split by age, gender, term, policy type, health status etc etc)

However, the contribution method takes this a step further by subdividing experience into granular homogenous groups when setting the dividen amount, is that correct?
Click to expand...


Yes :) Although I don't quite agree with how you have determined TBs. Generally the aim is to payout the difference between smoothed asset share and (SA plus reversionary bonuses (both currently attached and future discretionary bonuses)).
Also, the 'Additions to benefits' method can be argued as 'equitable' as it is paying out more to those who have been with the company the longest. But it is not as equitable as the 'Contribution' method, for the reasons you have provided above.
 
Ah yes sorry I forgot to mention that it was the smoothed asset share!

Thanks, that was causing me a great deal of confusion. Terms like cohort and specimen contracts weren’t clear to me. However I am happy enough that the broad principle is that contribution method essentially applys bonuses by looking at contribution to surplus in a more granular way. Thanks !!!
 
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