About Cost of Bonus

[ActauryKoala]

For unitised w/p contracts, the cost of bonus depends on the sources of the surplus and corporate structure. Under 0/100 corporate structure, the investment surplus goes to policyholders, other sources go to shareholder.

My question is,when we talk about bonus, we need to know the cost. Under convention w/p business, the cost is the supervisory valuation of the benefit additions.

Then, for UWP, what is the cost of bonus? Is that the investment return being granted through bonus rate+reserves being set up for the additional mortality cost in the sterling reserves? Any other components?

 

[Mark Willder]

For unitised w/p contracts, the cost of bonus depends on the sources of the surplus and corporate structure. Under 0/100 corporate structure, the investment surplus goes to policyholders, other sources go to shareholder.

Yes, this would be the most common way of dealing with unitised WP.

My question is,when we talk about bonus, we need to know the cost. Under convention w/p business, the cost is the supervisory valuation of the benefit additions.

If the business is 90/10, then the shareholders get one-ninth of the cost of bonus.

However, in a 0/100 structure we don't need to know the cost of bonus. The shareholders get all the expense and mortality surplus. The policyholders get all the investment surplus.

Then, for UWP, what is the cost of bonus? Is that the investment return being granted through bonus rate+reserves being set up for the additional mortality cost in the sterling reserves? Any other components?

For 90/10 conventional with-profits business the cost of a regular bonus is complicated. The bonus is declared now, but won't be paid until later death/maturity. So we value its cost by looking at the increase in the reserves.

90/10 unitised with-profits business is much more straight forward. The regular bonus increases the bid value of units, which is an amount in current money terms, ie the policyholder could surrender and take that money now (subject to any MVR or surrender penalty). So the cost of bonus is just one-ninth of the increase in bid value of units.

Best wishes

Mark