Q for ST 2, Ch 7 - Revalorisation Method

Revalorisation in its purest form involves increasing the premium, benefit and reserve all by the same proportion. But yes, it is possible in some countries to keep premiums level in return for a smaller increase in the benefits

Yes, the bonus is declared each year, but it is paid when a claim is made.

So for an endowment, the bonuses would be paid on death or maturity.

For a term assurance, the bonuses would be paid only on death in theory. The policyholder would get nothing on survival to the end of the term. However, I have never heard of a with-profits term assurance of this type being sold in practice.

Revalorisation products would usually be endowments or whole life.

Best wishes

Mark

 

Question 7.1 looks at the revalorisation method in its purest form. So the reserves, benefit and premium all increase by r% as described in the Core Reading. The formula given is roughly (using appropriate A and a functions for the given contract):

(1+r)V = (1+r)S A + (1+r) P a

The ActEd text then goes on to say that it is possible to use this method, but with a constant premium. So we set r to zero for the premium and find a new smaller r* for the benefit that satisfies:

(1+r)V = (1+r*)S A + P a

I hope this helps.

Best wishes

Mark

 

Yes, you have got this exactly right. Methods D to F are methods of calculating bonuses, while methods A to C are methods of paying out the bonuses.

In recent years some insurers have tried to introduce new types of with-profits contracts. Some of these approaches get a very brief mention in subject SA2. However, the vast majority of business sold follows one of the methods covered in ST2.

A with-profits term assurance policy would be pretty rare. However, I have worked on an accumulating with-profits TA in the past.

D and E use benefit increases (C), so the bonus is paid when a claim is made.

The contribution method (F) can use any of the types of bonus. If it uses benefit increases (C), the bonus is paid when a claim is made. If it uses cash bonus (A), the bonus is paid immediately. If it uses a premium reduction (B) then effectively the bonus is paid every time a premium is paid (ie the bonus reduces the premium).

Best wishes

Mark

 

Hello

An important feature to notice about the revalorisation method is that it splits the sources of profit into "savings" (ie investment) and "insurance" (ie everything else).

It is just part of the savings element that is distributed as bonus.

So the difference between actual and expected mortality and expense experience would be part of the "insurance" element. This is typically profit that ultimately belongs to the shareholders. It does not affect the bonus.

The savings element of the profit (ie the difference between actual and expected investment returns) is the item that determines the bonus.

This might work by using a formula of the form:
r% = k% (actual i% - expected i%)

Here the k% is pre-decided. It will be part of the policy terms and conditions. These may say, for example, that 90% of savings profits is distributed as bonus. (This implies that the other 10% belongs to the shareholders.)

If k=90%, actual i% = 5% and expected i% = 3% say, then r% = 1.8%.

This 1.8% is declared as a bonus by increasing the policy reserves by 1.8%. We can think of this as saying that, of the 5% investment return growth on the assets over the year, 3% was needed to cover the increase in the existing policy reserves, 0.2% was given to shareholders and 1.8% is given to policyholders.

The simplest way to increase the policy reserves by 1.8% is to increase the policy benefits and premiums by 1.8% (as in Mark's post above).

I hope this helps clarify this method a little.

Best wishes
Lynn

 

Hi

Chapter 7 of the course notes describes how the methods work and gives some examples of the calculations used.

Best wishes

Mark