Hello I would like to know the reason for distributing the bonus for par products to SH as 1/9 of cost of the bonus. This is mentioned in core reading chapter 1 page 3. I am just curious why are we using 1/9? Why not 1/11? Is there any regulation, history or guideline that states the formula?
Almost all companies give 1/9th of the cost of bonus to shareholders (unless they give 100% of surplus to policyholders) although there are no regulations or guidelines that force them to do this. We describe these companies as being 90/10 because the policyholders get 90% of the surplus through bonuses and the shareholders get 1/9th of 90% ie 10%. The 90/10 split has arisen historically. Companies are free to pay different amounts to shareholders and can even change the split if their rules permit, but in practice almost all insurers have kept to 90/10 as they don't want to be out of line with the market. Best wishes Mark
