Hi All, Can somebody please explain similarities and differences between Addition to Benefit Accumulating With Profit method and Contribution Method of bonus distribution?
Hello Rajat The two methods can be very similar. Each year, the contribution method uses the formula to calculate the dividend that can be paid to policyholders. This dividend can be used to purchase extra benefits, so in this way it is very similar to the additions to benefit method. Also both methods may have a terminal bonus. However, the dividend could instead be paid out as cash or could be used to reduce the premium. Another difference is that the contribution method uses the formula at the start of Section 2 of Chapter 7. The addition to benefits method allows the actuary far more discretion as the actuary is not tied to a given formula. Best wishes Mark
Hi Mark, I agree with your answer here, that when a dividend is paid out using the contribution method it could be paid via - cash, lowering of premiums or increase in initial sum assured. At least this is what the notes say as well. However, April 2021 Q3 (i) does not say this. Infact it says that the premiums remain unchanged throughout the policy? (Im referring to the ASET. Why does it say this?
Hello I agree that reducing the premium is an alternative way of declaring a bonus. However, the Examiners Report didn't cover this, which is why it's not in ASET. It is true to say though that the premium remains constant if the dividend is paid as cash or as an addition to benefits. I am sorry for the confusion here. Best wishes Mark
