Say we have a with-profits policy that has declared reversionary bonuses. Are reversionary bonuses paid at maturity? Will the declared reversionary bonuses be reflected in the i in Asset share=(ASt+P-E)*(1+i)-Sq(x+t)?
1. yes, unless paid as cash with the contribution dividend method 2. it will increase the S for the coming year
My understanding is that Asset share should increase in order to be sufficient enough to pay the declared bonuses and basic sum assured. Wont increasing S reduce the asset share and resulting in insufficient funds to pay out the declared bonuses and basic sum assured?
Yes, the asset share needs to be sufficient to cover the guarantees. However, I'm afraid you have this the wrong way around. We increase bonuses if the asset share is big enough to cover them. (We don't increase the asset share to cover the bonuses). Remember that the asset share is the retrospective accumulation of the cashflows in respect of the policy. So bonus declarations only affect the asset share calculation to the extent that they change the benefits that have been paid out in the past. Best wishes Mark
Hi Mark, I've been confused about asset shares for with profits policies but I do believe you have clarified. So just to reiterate, future bonus declarations don't affect the asset share. The cost of benefits used in the asset share is based on bonuses already paid out to a set of with profit policyholders? From online classroom, I see that the DB plus attaching bonuses should be used but I guess it should be attached bonuses as in past tense? Thanks again.
Yes, the current asset share is unaffected by future bonus rates. The only impact of bonuses on asset shares is in the amount of past claims. Yes, the cost of benefits is based on the benefits paid out to policyholder's that have already claimed. Their death benefits will include bonuses. I think attaching bonuses is fine. The bonuses currently attaching to a policy are the bonuses already declared in the past. But yes, again we are thinking about bonuses declared in the past rather than future bonuses. Best wishes Mark
