Ch7 With profits Dist(2)

Discussion in 'SP2' started by Actuary@22, Jan 4, 2022.

  1. Actuary@22

    Actuary@22 Very Active Member

    Hi
    I have 2 doubts in this chapter.
    1)In sec 3.2-Business Objectives of the company solution to the question states that under "Accumulating With Profits lesser extent of smoothing of bonuses is expected than conventional additions to benefit".Please explain why.

    2) In Sec 3.4- Provision of Capital pg 19 as per Acted 2019 notes states that "there is less scope for deferral of profit under Revalorisation Method."Please explain why.

    Thanks in advance
     
  2. Mark Willder

    Mark Willder ActEd Tutor Staff Member

    Hello

    Thanks for the clear references. I'll answer your questions in turn:

    1) Accumulating with-profits (particularly in its unitised form) is often sold alongside unit-linked. The transparent nature of the fund size makes it easy for policyholders to compare their unitised WP and unit-linked funds. So there's competitive pressure for unitised WP to behave in a similar way to unit-linked, eg by having less smoothing.

    As the policyholders do not know the current value of their conventional with-profits contract (they only get to see the guarantees/bonuses that will be paid at maturity) then policyholders cannot compare returns on conventional WP with unit-linked. This gives the insurer much more freedom in bonus decisions.

    2) An insurer can defer the distribution of profit by declaring a lower regular bonus and instead paying a terminal bonus. However, the revalorisation method does not include a terminal bonus and so cannot defer the distribution of surplus in this way.

    Best wishes

    Mark
     

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