Investigating sustainable reversionary bonus rates

[Colin Colraine]

When a company undertakes an investigation to determine sustainable reversionary bonus rates, my understanding is that it carries out a gross premium valuation of the with-profits business and compares this to the market value of the assets.
Would this effectively be a real-world projection, as opposed to a risk-neutral projection, and therefore the discount rate used would be based on the expected return of the assets backing the asset shares?
This seems more intuitive to me, given that the bonus rates will be influenced by the actual investment return achieved.

 

[Em Francis]

When a company undertakes an investigation to determine sustainable reversionary bonus rates, my understanding is that it carries out a gross premium valuation of the with-profits business and compares this to the market value of the assets.
Would this effectively be a real-world projection, as opposed to a risk-neutral projection, and therefore the discount rate used would be based on the expected return of the assets backing the asset shares?
This seems more intuitive to me, given that the bonus rates will be influenced by the actual investment return achieved.

Hi Colin

This will depend on the reason for the investigation. If it is a regulatory solvency requirement, such as SII, then the discount rate is the risk-free rate, whereas internal purposes, such as determining suitable reversionary bonus rates to declare, the assumptions would be on realistic basis with investment return being a realistic assessment of rates that may be earned in the future on the backing assets.
Hope this helps.

Thanks
Em