Ch 19 Surplus distribution

[Actuary@22]

Hi

Under Section-3-Timing of Surplus distribution section I am not very clear with if under Solvency 2,we do reserve for terminal bonus or not?
If we do reserve for TB so then how does deferral of surplus help to manage the capital position?

 

[Mark Willder]

Hi

Under Section-3-Timing of Surplus distribution section I am not very clear with if under Solvency 2,we do reserve for terminal bonus or not?
If we do reserve for TB so then how does deferral of surplus help to manage the capital position?

Yes, we reserve for terminal bonus under Solvency II. But the cost of guarantees is lower if we defer surplus.

 

[Actuary@22]

I also have the following doubts in this chapter:

2.On page 19, the question asks to 'State the main ways in which accumulating with-profits business differs from conventional with-profits business, under the following headings:
- calculation of asset shares
- competition
- sustainability'

Why is sustainability less important?

3.Pg 23 Section 6 Please explain how bonuses will be increased in the longer term in the below para.

"
Even if a company is closed to new with-profits business, projected volumes of other
products are relevant here. For example, high levels of profitable without-profits and/or
unit-linked business may produce capital strain in the short term but will potentially
increase bonuses in the longer term."

4.Section 8 I didnt understand at all what the below para is saying about mortality experience.
Mortality experience

"This is different to the ‘additions to benefits’ method where, for conventional with-profits polices,
the only likely allowance for difference in mortality between groups is made in the with-profits
premium rates. Any additional differences in mortality not allowed for in this way would be
treated as part of the pooling of risks."

 

[Actuary@22]

Hi Could someone please help out?

 

[Lindsay Smitherman]

I also have the following doubts in this chapter:

2.On page 19, the question asks to 'State the main ways in which accumulating with-profits business differs from conventional with-profits business, under the following headings:
- calculation of asset shares
- competition
- sustainability'

Why is sustainability less important?

This is answered in the section headed 'Regular bonuses' which appears on the same page as that question. For AWP, regular bonuses tend to more closely reflect recent investment returns, rather than (as is the case for conventional WP) being set at a level that is felt to be sustainable throughout the remaining term of the policy.

 

[Lindsay Smitherman]

3.Pg 23 Section 6 Please explain how bonuses will be increased in the longer term in the below para.

"
Even if a company is closed to new with-profits business, projected volumes of other
products are relevant here. For example, high levels of profitable without-profits and/or
unit-linked business may produce capital strain in the short term but will potentially
increase bonuses in the longer term."

Profits from this profitable business will be added into asset shares (provided this business is written in the WP fund of course), hence would enable higher bonuses to be paid

 

[Lindsay Smitherman]

4.Section 8 I didnt understand at all what the below para is saying about mortality experience.
Mortality experience

"This is different to the ‘additions to benefits’ method where, for conventional with-profits polices,
the only likely allowance for difference in mortality between groups is made in the with-profits
premium rates. Any additional differences in mortality not allowed for in this way would be
treated as part of the pooling of risks."

What this is saying is that, fundamentally, under the 'additions to benefits' method the total WP mortality profit / loss arising is shared (pooled) across all WP policyholders without any differentiation. In contrast, under the contribution method, the WP policyholders are arranged into groups (eg by age) and each then shares the mortality profit / loss relating to that group of policies.