In Section 6 on page 23 of Chapter 6 it states that policyholders often share only in the investment surplus under unitised accumulating with-profit contracts and not the surplus arising from other sources. It is not clear to me why this is. Anybody got any ideas?
My guess is that if shareholders are stumping up the capital for policies to be in force in the first place that any other profit will be attributable to them.
That's fair enough if shareholders are financing new business strain but what about risks such as mortality, expenses, withdrawals etc. Also, what happens if insurer is a mutual?
I think it says "often", and this is due to the way that the policies are specified. Accumulating with-profits increase in value every day, and on a charges (rather than expenses) basis. It is easier to keep a daily track of investment returns than it is for mortality profits, and so daily adjustments (eg MVRS) can be applied. If policyholders participated in mortality profits, and a mortality loss was made, their Asset Share should immediately be decreased. This would be an expensive process to administer...
I agree with all this. Also I think UWP often appears to policyholders as a variant of unit-linked, in which the investment returns are smoothed. Apart from this, though, policyholders' expectations are as for UL - ie that the insurer will charge for risk and expenses, and that profits from these sources won't be shared with them. Of course, policyholders would need to be properly informed of what's going on.
