sep 2014 q1 iii

[dimitris13]

hi,

for special bonus it mentions would lead an immediate transfer to share holders too.
isnt itbthe same for reg bonuses? and if not why ?

thanks

 

[Em Francis]

hi,

for special bonus it mentions would lead an immediate transfer to share holders too.
isnt itbthe same for reg bonuses? and if not why ?

thanks

Hi

Yes it would. However, reversionary bonuses build up expectations, ie once a regular bonus is declared, policyholders may expect the same bonus to be declared at the following declaration. As such they are effective at distributing constant forming surplus, such as investment return from fixed interest. On the other hand, SRBs are effective at distributing one-off surplus as they shouldn't build any expectations around future declarations.
Hope this helps.
Thanks
Em

 

[Rajoshi Ray]

Hi !
The solution for this question mentions "An alternative approach would be to declare a special bonus." - as a method of distributing surplus and then goes on to state -
"It will still be necessary to enhance asset shares as above…
… otherwise, the terminal bonus process would effectively remove the
addition."
the special reversionary bonus increases the guaranteed benefit under the policy. Why would you also enhance the asset share for the same? this would indirectly result in a higher terminal bonus - so takes credit for the same 'surplus' twice, in 2 different ways?
Are these not independent mechanisms altogether?

Thanks in advance

 

[Em Francis]

Hi !
The solution for this question mentions "An alternative approach would be to declare a special bonus." - as a method of distributing surplus and then goes on to state -
"It will still be necessary to enhance asset shares as above…
… otherwise, the terminal bonus process would effectively remove the
addition."
the special reversionary bonus increases the guaranteed benefit under the policy. Why would you also enhance the asset share for the same? this would indirectly result in a higher terminal bonus - so takes credit for the same 'surplus' twice, in 2 different ways?
Are these not independent mechanisms altogether?

Thanks in advance

No, it wouldn't result in a higher terminal bonus (TB) as the the TB increases the g'teed payout to equal the asset share. The TB is determined by comparing g'tees with the asset share. If the g'tees increase as a result of the SRB then the TB declared will be smaller which will net down the impact from the declaration of the SRB. By enhancing the asset share, the TB declared should remain the same as before the SRB was declared.

 

[Rajoshi Ray]

No, it wouldn't result in a higher terminal bonus (TB) as the the TB increases the g'teed payout to equal the asset share. The TB is determined by comparing g'tees with the asset share. If the g'tees increase as a result of the SRB then the TB declared will be smaller which will net down the impact from the declaration of the SRB. By enhancing the asset share, the TB declared should remain the same as before the SRB was declared.

That makes sense - thank you!