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Ch22 p11 Q22.6

S

scarlets

Member
OK, can I please check I am understanding this properly now...

Say a bonus of 100 is declared at t= 10. Policy matures t = 20.

It's a 90/10 policyholder/shareholder split.

Shareholder gets 10 transferred at t = 10, policyholder gets 90 at maturity t = 20.

Discounting 10 over 10 years compared to 90 over 20 years means the PV of bonuses is not a 90/10 but may be 87/13? Thanks.
 
Don't think that's quite the point - rather, as follows:

Shareholder gets 10 at time of declaration, and a reserve of 90 is set up for the policyholder bonus. But this is set up on a prudent basis, whereas on a realistic basis it only has a present value of, say, 70 instead of 90. So actually policyholder only gets 70/80 of the value, rather than 90/100.
 
Wouldn't they set up something between 70 & 90 for the policyholder bonus? As you don't know when it's paid out, plus as you say reserve would be prudent? But reserve of 90 at t=10 would be far too prudent surely. In which case, I can't see how a 90/10 is ever really a 90/10 when we work out the PV's.
 
If my point above is valid, then if RB's are used to estinguish the estate, wouldn't shareholders get more than 10% when considering PV?
 
Wouldn't they set up something between 70 & 90 for the policyholder bonus? As you don't know when it's paid out, plus as you say reserve would be prudent? But reserve of 90 at t=10 would be far too prudent surely. In which case, I can't see how a 90/10 is ever really a 90/10 when we work out the PV's.

Ah, think I get your confusion now. When you declare a bonus, you don't distribute 1/9 of the face value to the shareholders - you distribute 1/9 of the reserve that needs to be set up.

So for example, we might declare a bonus of 120. Discounted at the valuation interest rate, it would have a present value of 90, so we'd distribute 10 to shareholders.

But that rate is prudent. So on a realistic (higher) interest rate, the present value may be 70. But we still distribute 10 to the shareholders, so in realistic terms they are getting 10/80 of the value of declaration, not 10/90.
 
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