Chapter 19 - Surplus distribution

Insurers would only want to declare one RB rate across a whole product. If you look at the precise wording of that statement, it is about maintaining guarantees on policies of certain durations. The special bonus allows the company to uplift the guaranteed benefits by adding it only to the policies of those durations (the ones it is concerned about). Using a special bonus also has the benefit that it is understood to be a one-off, without creating expectations of higher continued regular bonuses.

 

Hi - I think you are confusing here the concepts of smoothed payouts (ie payouts relative to actual asset shares) and smoothing RB rates.

The points that you are (sort of) quoting are missing important phrases from how they are actually expressed in the course notes. The first explicitly refers to 'is likely to smooth payouts more' and the second says 'it may smooth its reversionary bonus rates less'.

If the company is only using RB and does not use TB at all, then it is much harder to pay out exactly the asset share. This is because TB can be set for homogenous groups of policies (eg split by duration in-force) specifically to meet the difference between asset share and guaranteed benefits awarded to date. RB is a more blunt tool - it just adds a given % each year, normally the same rate for all policies of a particular product. Hence payouts are likely to be further from (actual, unsmoothed) asset share through the use of RB only, and the overall payouts are therefore likely to be more smoothed than if TB were also used.

However, because the insurer only has the ability to change RB rates in order to attempt to get close to asset share, it is likely to change these more frequently than it would if it also had TB in place. That's because the RB rates are the only mechanism it has in order to obtain an appropriate level of payout.

 

A discounted cashflow valuation is relatively unlikely to be chosen, but it might be used where market values are volatile or where they are difficult to obtain. Determining whether RB rates are supportable is a relatively high level assessment looking over the remaining lifetime of that business, and current market values might be felt to be temporarily distorted for whatever reason so that they would not give an appropriate longer-term view.

 

Yes they could - they are effectively equivalent. As we state in the third paragraph on page 8, the 'cashflow addition to asset share' for the surrender profits could be spread in proportion to asset share, which is the same as 'a percentage addition'. It's just different ways of expressing the same thing.