• We are pleased to announce that the winner of our Feedback Prize Draw for the Winter 2024-25 session and winning £150 of gift vouchers is Zhao Liang Tay. Congratulations to Zhao Liang. If you fancy winning £150 worth of gift vouchers (from a major UK store) for the Summer 2025 exam sitting for just a few minutes of your time throughout the session, please see our website at https://www.acted.co.uk/further-info.html?pat=feedback#feedback-prize for more information on how you can make sure your name is included in the draw at the end of the session.
  • Please be advised that the SP1, SP5 and SP7 X1 deadline is the 14th July and not the 17th June as first stated. Please accept out apologies for any confusion caused.

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?
 
scarlets said:
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.
Click to expand...

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.
 
You must log in or register to reply here.
Back
Top