Hi I needed help with understanding the following sentence of the core reading on pg 11 of chapter 26: "Also, the company may use smoothed earned asset shares so as to avoid fluctuations in the supportability of the reversionary bonuses due to fluctuations in market values." I assume we need to ensure that the RB is sustainable under changes in MV of assets then why smoothed the EAS? Is it because we assume the same smoothing to be applied to the bonus? Thanks for the help
Section 3.3 is looking at setting bonus rates. Two different things need to be considered: supportability of bonus rates and equity of bonus rates. The discussion on page 10 looks at sustainability. However, the section you quote on page 11 is concerned with equity (and so is mainly concerned with smoothing). The idea behind your quote is that perhaps the correct bonus rate to declare is the rate that is sustainable using smoothed asset shares. On average this will payout a bonus rate that each policy can afford, but by using the smoothed asset share, the redsulting bonuses will also be smoothed - so bonuses will sometimes be more or less than can be afforded, but that will be fine as long as the estate is large enough to absorb the difference. Best wishes Mark
