Hi Is there anyone can explain what is bonus earning capacity and how is it related to asset share? Thank you.
Hi You will find bonus earning capacity defined in the SA2 glossary, basically as the rate(s) of bonus that can be sustained by the contracts over their remaining duration - ie how much bonus the company expects to be able to afford on those contracts for the rest of their lifetime. The use of asset shares to determine this is explained in Section 2 of Chapter 19. If you set current asset share equal to a gross premium valuation of the contracts, where the latter includes explicit allowance for future bonuses, the bonus earning capacity is determined as the future bonus rate(s) that achieves that equality.
Thanks Lindsay, the explanation is indeed very helpful. I have another question here. A company is able to recognise profits beyond contract boundaries. Could you give some examples on what kind of profits would that be? Thank you.
Hi - I am not sure in what context you are making the statement 'is able to recognise profits beyond contract boundaries'? Do you mean contract boundaries as defined under Solvency II? Profits arising beyond the contract boundaries cannot be recognised in the Solvency II balance sheet, but could be for other more 'realistic' valuation purposes such as an EV calculation or assessing economic capital. The course gives an example of a Solvency II contract boundary as the ten year policy anniversary for a regular premium whole life assurance product which has premiums that are fully reviewable premiums at that ten year point. So 'profits beyond contract boundaries' would be the profits arising on premiums expected to be received beyond the premium review date.
