Terminal bonus

Discussion in 'SA2' started by Mbotha, Sep 3, 2017.

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  1. Mbotha

    Mbotha Member

    I have a few questions on terminal bonus:
    1. Would a TB be payable on death? The reason I'm asking is because TBs are intended to bring the payout close to the asset share and, if the policyholder dies at a time where the AS is less than the guaranteed benefit, then a TB addition would widen this gap further.
    2. If a TB is payable on death, would the TB be the rate set at the previous TB bonus investigation / review? Or does the company compare the policy's AS to the guaranteed benefit to at this point to make the TB decision?
     
    Mbotha, Sep 3, 2017
    #1
  2. Viki2010

    Viki2010 Member

    TB can be paid on surrender, death or maturity (survival).....I think.
     
    Viki2010, Sep 3, 2017
    #2
  3. Lindsay Smitherman

    Lindsay Smitherman ActEd Tutor Staff Member

    Yes you are correct: it can! Terminal bonus is paid on each of these different types of claim in order to increase the payout to be broadly equal to the asset share - assuming that the guaranteed benefit is lower than asset share. If the guaranteed benefit is higher than the asset share, it is likely that the terminal bonus rate would be zero.

    Terminal bonus is not determined separately for each individual claim. Tables of TB rates are put together by the company periodically and these tables are then used for all claims occurring in the period for which the table is active. These tables of rates may be updated annually, semi-annually, quarterly or perhaps more frequently (particularly if economic conditions change markedly).
     
    Lindsay Smitherman, Sep 3, 2017
    #3
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  4. Mbotha

    Mbotha Member

    So would this table be based on policy duration (perhaps grouped) and, say, investment return? E.g. For each duration group, the TB table could look like this:
    • High investment returns: TB = 10%
    • Investment returns as expected: TB = 5%
    • Low returns: TB = 0%
    (Is that how we would decide not to pay a TB in the case of the guaranteed benefit being higher than AS, without assessing it for the individual claim?)
     
    Mbotha, Sep 5, 2017
    #4
  5. Lindsay Smitherman

    Lindsay Smitherman ActEd Tutor Staff Member

    There won't be different terminal bonus rates for different investment returns: the rates will only depend on the historic investment returns to date. For a particular product, there will just be a different rate according to the duration in-force (deaths/surrenders) or maturity term. The rates are set using specimen policies, and these rates are then applied to each claim that occurs during the period for which the table is current.

    if the specimen policy asset share is lower than the guaranteed benefit, then yes: the TB rate for that model point would be zero.

    If investment markets move materially, the company is likely to update the terminal bonus tables to reflect this.

    [The above applies to conventional with-profits business. As described in the Core Reading, more complex approaches might be used for unitised with-profits business such as the use of shadow funds. And MVRs may also be used.]
     
    Lindsay Smitherman, Sep 5, 2017
    #5
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  6. Mbotha

    Mbotha Member

    I noticed that this part of the chapter (investigations for AWP cotracts) is all non-core reading. Is it safe to assume that we wouldn't be expected to explain these approaches in detail?

    The part that does have core reading (section 5.5) says:
    • "Discounted CF methods would be used instead of gross premium valuations where there are fixed charges." I'm not sure what this means? Also, isn't a gross premium valuation a discounted cashflows method anyway?
    • It then goes on to say "...projections of earned asset shares may be more commonly used." This feels contradictory to the previous statement.
    I'm not sure what I'm missing?
     
    Last edited by a moderator: Sep 9, 2017
    Mbotha, Sep 9, 2017
    #6
  7. Viki2010

    Viki2010 Member

    Gross Premium valuation works more as a calculation based on Present Values with commutation functions - CT5 type formulae - whereas discounted CF methods are based on projections of cashflows - used for UL, UWP.
     
    Viki2010, Sep 9, 2017
    #7
  8. Viki2010

    Viki2010 Member

    I am a bit confused here as well, as the core reading describes gross premium valuation as the method used for investigations. At the same time the core reading mentions stochastic methods. Wouldn't stochastic projections only be possible for discounted cash flow method as opposed to gross premium valuation?

    And a further question, would Gross Premium valuation be based on Best Estimate assumptions or assumptions with margins would be allowed? - this is in context of Investigations for bonus supportability....
     
    Last edited by a moderator: Sep 10, 2017
    Viki2010, Sep 10, 2017
    #8
  9. Mbotha

    Mbotha Member

    I'm still not sure I understand...if anyone can assist with this, please. :)
     
    Mbotha, Sep 12, 2017
    #9
  10. Mark Willder

    Mark Willder ActEd Tutor Staff Member

    A gross premium valuation is any method that allows for the full office premium and the expenses (as opposed to a net premium valuation which ignores expenses and uses the net premium). In CT5 you will have calculated gross premium valuations using formulae. However, you can calculate them using discounted cashflows too. For example, you could use a spreadsheet to calculate the cashflows for each year (premiums less claims less expenses plus investment return) and then discount these.

    Best wishes

    Mark
     
    Mark Willder, Sep 12, 2017
    #10

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