I read somewhere in either of ch 6 or 7 that- terminal bonus = difference between Asset share and maturity benefit if this is the case, then what profit is the company earning ? I am asking this, because it seems from above equation that complete asset share is paid in the form of terminal bonus after the payment of maturity value
You said that terminal bonus = asset share less maturity benefit. I'm afraid this isn't true. The maturity benefit for with-profits contracts would generally be close to the smoothed asset share. Instead your formula for conventional with-profits should say that the maturity benefit equals the sum assured plus the regular bonus plus the terminal bonus. So the idea is that the terminal bonus is the balancing item that brings the guaranteed payout up to the (smoothed) asset share. But you are right that if the company pays out the full asset share then there is no profit for the company at maturity. However, if you look at the chapter on asset shares you will see that shareholder transfers can be deducted from the asset share. So that profit has been made by the insurer over the life of the with-profits contract. In practice, a common structure for with-profits contracts is to give the shareholders one-ninth of the cost of bonus. So every time a bonus is declared for the policyholder, the shareholders get something too (and this amount is then deducted from the asset share). Best wishes Mark
I do agree with your explanation mark, but kindly refer to section 3.4 "Terminal bonus" under ch-6 where it is mentioned that terminal bonus equals difference b/w asset share and (maturity benefit including reversionary bonus) This equation means co. is keeping no part of asset share with it after maturity and distributing everything to policyholder
In the exam you will need to be very precise with your definitions. The Course notes do not say that terminal bonus equals difference b/w asset share and (maturity benefit including reversionary bonus). The course notes actually say: "To do this we set the terminal bonus to be equal to the difference between the asset share and benefits guaranteed to date at the policy maturity date (initial guaranteed plus reversionary bonuses)." I think you are confusing the "maturity benefit" with the "guaranteed benefit at the maturity date" which are quit different things. But yes, this does mean that the company is keeping no part of the asset share at maturity and is distributing everything to the policyholder. But note from my earlier post that the shareholders have been deducting a transfer from the asset share every time a bonus is declared. So the shareholders will have benefited from the contract through these transfers.
