reversionary bonus

in the notes, it states that a compound bonus approach defers more of the distribution of surplus than a simple approach, and a super-compound approach defers more than a compound approach.

I would like to know firstly how the bonus work and how it defer the distribution of surplus, cuz for my understanding, as soon as the bonus declared by the insurer, you can simply cash out of the bonus, however here it says it defer the distribution of surplus, I am confused..

2nd, why the statement above is true? thank you everyone!!

 

Deferral of surplus refers to surplus being earned by the company but not yet distributed by way of bonus declarations.

Have another look at the graphs in the answer to Q6.5. These show the build up of guaranteed benefits under the three methods. All three graphs start at the same SA and end at the same total guaranteed benefits, but we can see the build up is slowest (ie deferral is greatest) under super-compound method.

It would be unusual to be able to "simply cash out the bonus". The bonus is an addition to guaranteed benefits and is payable on death or maturity. The guaranteed benefits aren't available on surrender - a (smoothed) asset share is likely to paid on surrender.

However, some companies may allow bonuses to be surrendered separately, but this is rare.

 

Thank you so much.

However in the notes, it state the expectation of with profit p/hs is that some of this annual profit will returned in the form of :
an increase in the minimum guaranteed benefit, or
a reduction in the level of future premiums payable, or
a one-off cash bonus

Is it true that the deffering things do not work for the 2nd and 3rd cases?

 

Your original post related specifically to the Additions to Benefits method of distribution.

The notes that you now refer to appear right at the start of the chapter and are more general.
The first case can happen under any of the 3 distribution methods, but the 2nd and 3rd cases relate to the Contribution method.

The version of the Revalorisation method described in the notes assumes there is no deferral - each year the entire investment surplus is used to increase the reserves.

The version of the Contribution method described in the notes assumes that unless there is a terminal dividend, then there is no deferral - each year the entire surplus is distributed to policyholders.

 

Hello Mike,

That's interesting as you said the investment surplus is used to increase the reserves, however as I found that the reserves depend on the SA and premium too, does it mean when you increase the reserves, same time you increase SA and premium, if in this case, more investment earning, more premium should the p/hs to pay because of the increasing in reserves?

 

Yes