In the monitoring experience Chapter 30, Section 4.4, it is mentioned that if the item was surplus was non - recurring ,the insurer will decide whether to distribute that surplus to with profits policyholders. Now for example if the surplus is from mortality then we generally calculate it as Actual Experience - Expected Experience where the expected experience is on valuation basis. This reconciles with the calculation of dividends using the contribution method where actual vs the valuation basis is taken to calculate profit/loss. But in Chapter 6, With Profits Surplus Distribution it is mentioned in section 2(Distribution of Profits) , Paragraph 3(last few lines):" The premium basis can be based on more realistic forecast of these". My question is when we determine what to distribute to policyholders as bonus, do we use the actual experience vs valuation basis or actual experience vs pricing basis? Also how are the reversionary bonus rates set in a life insurance company suppose for example for a with profits endowment assurance product?
Hi We use both really! Broadly, the actual experience vs pricing basis will determine the amount of profit that is earned over the life of a policy. But the company needs to demonstrate solvency during the life of the policy, and comparing actual vs valuation is telling us about how much profit is available over a given year. There's a section ('Determining regular reversionary bonus rates') in Chapter 6 that describes this.
