Special RB-Ch20

[Actuary@22]

Hi

In chapter 20,section 2.2 Special Reversionary bonus-not very clear with the following

I)However, as they are not included in reserves (or technical provisions) until the point at
which they are expected to be declared, the impact of their declaration on free assets (or
own funds) will be more significant. Again, they will impact the cost of guarantees.

How will it Special RB impact COG when these bonus are not essentially guaranteed and are one off?

II)
Estate distributions can be made in this way but are more usually distributed as terminal
bonus. This avoids the increase in the cost of guarantees that arises from distributing such
one-off surplus allocations as a guaranteed bonus (and in fact the cost of guarantees may
decrease, due to the increase in asset share). However, this approach is less attractive for
the policyholders.

Didnt understand what the paragraph means and especially the line in bold? How will asset share increase and COG decrease?

 

[Lindsay Smitherman]

Hi - I think you mean Chapter 19? It sounds like you might be using an old version of the course, which could be problematic.

I) Special RB is guaranteed once declared, ie it increases the level of guaranteed benefits (just like normal RB). [This is indicated in the first Core Reading paragraph of that section.]

II) If the company wants to distribute the estate as higher TB, it would achieve this by increasing asset shares (equivalently, a 'transfer from estate' amount is added into the asset share calculation). Higher asset shares -> lower COG due to lower chance of guarantee biting.