reserve question about with-profit contract

[Jo_Jo]

could you explain how to calculate reserve for endowment assurance with simple/ compound rate bonus. do i need seperate endowment assurance into pure endowmnet and term assurance ? should i calculate up to date sum assured for pure endowmnet and term assurance seperately as well?

 

[Mark Mitchell]

The important thing is to make sure that you value the benefits given in the question and follow the rules for calculating reserves given in the notes.

So - in general - if you are calculating a net premium reserve for a with profits contract you need:
- to calculate the net premium ignoring bonuses (so no need to separate out the endowment assurance there)
- then calculate the reserve using the net premium and allow for bonuses already declared (but not for future bonuses). I can't see where you'd need to split the endowment assurance down here, either.

However, where it can be important to split the endowment assurance down is when you're calculating a gross premium (which allows for bonuses). Here you have to be careful about what benefits the policyholder gets i.e. whether the bonus vests at the start or end of the year.

So, for instance, if bonuses vest at the end of the year, the payment on survival to the end of the term will be different to the payment on death in the final year of the term (as there's a bonus that vests at maturity). Here, it's generally easiest to split up the endowment to ensure you're valuing the correct payments on death and maturity.

It may help if you draw out a table showing what payment would be made on death in each year and on maturity, to check that your expression correctly represents the payments made.

Hope this helps you out.