Asset share can be used to help calculate both the regular and terminal bonuses for participating (with-profits) products. The payout on WP contracts is often the smoothed asset share. The terminal bonus is effectively the balancing item to achieve this. Given that we are aiming to pay out approximately the asset share, we need to make sure that the regular bonuses aren't too large, ie we don't want the guarantees to be bigger than the asset share at maturity. One way to achieve this is to set regular bonuses equal to the bonus earning capacity (BEC). To calculate the BEC we project the asset share to maturity (today's asset share plus premiums less cost of claims less expenses plus investment return) and equate it to the payout (current guarantees plus future regular bonuses plus an allowance for terminal bonus). The BEC is the rate of regular bonus that ensures equality betwee the projected asset share and the projected benefits. Best wishes Mark
Thanks for reply. I have more question on this,we follow to calculate bonus scope as that Assetshare - (BEL+COC+shareholder'strasfer PV) ? Why we use this method to calculate bonus scope ?
The scope to pay bonuses is the difference between the money we have from the policyholder (ie their asset share) and the money we need to have (eg to pay guaranteed benefits and any shareholder transfers). How we measure the money we need to have is subjective. The approach may vary between companies and will depend on the regulations. There are also several different approaches to calculating asset shares, eg some companies would make a deduction for the cost of capital as the policyholder has benefited from this capital (eg to cover their new business strain). A deeper discussion of these factors is covered in Subject SA2. Best wishes Mark
Thanks Mark for reply! What i understood that there are different approaches to calculate reversionary Bonus scales using Asset share either through BEC or above mentioned approach . Am i correct ? I am bit confuse with surplus relation with Asset share and reserve. I heard that surplus is (difference in actual experience and assumptions at time of pricing regarding mortality ,expense,interest rate ) Then if we are comparing AS and BEL ,then how we are calculating surplus to distribute to par policies? Sometimes i heard that surplus is (difference in actual experience and assumptions at time of Reserving regarding mortality ,expense,interest rate ) ? Please clear me on this . I am sorry if i am asking very simple or too weird.
Surplus is the assets less liabilities. The surplus arising (sometimes confusingly referred to as surplus) is the change in surplus over the year. It arises because the actual experience has been different to that expected (and also due to any interest on the existing surplus). It is this surplus arising that we want to distribute as bonuses. Surplus can be measured in different ways, eg depending on what we include in the reserves. In your comments above you refer to the BEL (best estimate liabilities) which is the starting point for reserving calculations such as the Solvency II regulations used in the EU. However, using this as a means of calculating the surplus to distribute to policyholders is complex and beyond the scope of the ST2 course. In the surplus distribution chapters of ST2, we consider a traditional reserving approach where assumptions include margins. The reserves are therefore bigger than the BEL and so we would expect that actual experience will usually be better than expected, ie we will have surplus arising. It is this surplus that we then distribute through bonuses. I get the feeling from the terminology you have used in your questions, that you are trying to reconcile the ST2 course to the approach you use at work. But that is beyond what we can cover in the ST2 Forum. Best wishes Mark
Subject ST2 covers distributing surplus using the addition to benefit (both conventional and unitised with-profits), revalorisation and contribution methods. Subject SA2 currently covers the UK situation in more detail. So it uses the additions to benefit method and links into current UK regulations such as Solvency II. Best wishes Mark