Hi In Section 3,Timing of surplus distribution,didnt understand the following- Maximisation of shareholder transfers implies deferring the emergence of surplus as little as possible, as the rate of return required by shareholders will usually exceed the rate at which undistributed surplus accumulates within a life insurance company. As per my understanding,if surplus is deferred means more TB so fund maybe able to earn a higher investment return(due to a riskier investment strategy) and shareholders may get a higher transfer as a result. Didn't quite understand the para above and why would they want to defer the emergence as a little as possible.
[I've edited the title of this thread to refer to the correct Chapter number] Shareholders would prefer to receive their transfers earlier rather than later because (as is indicated in the paragraph quoted) their required rate of return is normally higher than the investment return expected to be earned if the money stays invested within the insurance company. Even if the fund moves to a riskier investment strategy, then this is still likely to be true - otherwise the shareholders might as well just invest all their money into those same assets, rather than holding shares in the insurer.
Say for example: 100 is transferred from a free asset to an asset share and this is used to enhance the bonus distribution. say for example this 100 has become 110 after 2 years and is given to shareholders (for easy understanding we are assuming 100% is being transferred to shareholders). But the shareholder-required rate of return is say 13% (i.e RFR + risk premium), and the PV of 110 is much lesser. Shareholders would benefit if 100 is given at time 0 instead of 110 at a time because of the higher discount rate.
