With Profits - 90/10 and 0/100 funds

[Missannuity]

I'm a bit confused by the concepts of 90/10 and 0/100 funds, especially for UWP where there may be an explicit charging structure.

For CWP, it's usually 90/10, so policyholders receive 90% of surplus and shareholders 10%. I presume this covers all sources of surplus (investment, expense etc)?

For UWP, chapter 23 says that the structure can be either 90/10 with no explicit charging structure (which I presume is the same as the CWP case above?). Or instead, policyholders can receive all of the investment surplus through bonuses, and shareholders receive all other sources of surplus via an explicit charging structure.

What is meant by an explicit charging structure? And why in this case do we separate the investment surplus from other sources of surplus? The second case is not a 0/100 fund?

Thanks

 

[almost_there]

For CWP, it's usually 90/10, so policyholders receive 90% of surplus and shareholders 10%.

Hi, I don't intend to hijack your thread but I'm also confused as to 90/10, as sometimes I've seen it interpreted as shareholders get 1/9th the cost of bonus rather than 1/10th i.e. 10%.

 

[Em Francis]

I'm a bit confused by the concepts of 90/10 and 0/100 funds, especially for UWP where there may be an explicit charging structure.

For CWP, it's usually 90/10, so policyholders receive 90% of surplus and shareholders 10%. I presume this covers all sources of surplus (investment, expense etc)?

yes

For UWP, chapter 23 says that the structure can be either 90/10 with no explicit charging structure (which I presume is the same as the CWP case above?). Or instead, policyholders can receive all of the investment surplus through bonuses, and shareholders receive all other sources of surplus via an explicit charging structure.

What is meant by an explicit charging structure? And why in this case do we separate the investment surplus from other sources of surplus? The second case is not a 0/100 fund?

Thanks

If policyholders receive none of the non-investment return surplus then this is a 0/100 fund. For there to be a surplus the actual has to be better than the expected. The charges (to asset share) will be based on expected. Any profit arising from actual being better than expected will then belong to shareholders.

If an explicit charging structure is used in a 90/10 fund then 90% of the profits arising from actual being better than expected (in the charging structure) should be returned to policyholders. Therefore expenses are normally deducted from asset share as actual expenses and so there is no need to make an addition to asset share if actual is better than expected.

Hope that makes sense.
Thanks
Em

 

[Missannuity]

So in a 0/100 fund, where does the investment surplus go? Does it go to policyholders via bonuses? Why do we distinguish between investment and non-investment surplus in a 0/100 fund?

And what happens if there is no explicit charging structure?

I'm also confused by almost_there's question above, where the notes say that in a 90/10 fund, shareholders receive 1/9th of the cost of bonus. Why not 1/10th, ie 10%?

Thanks

 

[mugono]

So in a 0/100 fund, where does the investment surplus go? Does it go to policyholders via bonuses? Why do we distinguish between investment and non-investment surplus in a 0/100 fund?

And what happens if there is no explicit charging structure?

I'm also confused by almost_there's question above, where the notes say that in a 90/10 fund, shareholders receive 1/9th of the cost of bonus. Why not 1/10th, ie 10%?

Thanks

Missannuity

1. In a 0/100 fund all investment surplus goes to policyholders (not s/hs) via bonuses. The bonus mechanism is used to smooth the investment profit/losses - THE main marketing attraction of the product compared to (say) unit-linked business.

2. We need to differentiate between investment and non-investment surplus in a 0/100 fund because we need to know which surplus belongs to whom. Investment surplus belongs to policyholders and non-investment surplus belongs to shareholders.

3. Em mentioned that the explicit charging structure is based on actual expenses. If there is no explicit charging structure then these actual expenses would not be explicitly deducted from asset shares and would need to be allowed for somehow.

4. With Profits fund are ring-fenced and there are strict rules around its management including surplus extraction. The 1/9th cost of bonus is typically prescribed and in reality can be any number as outlined at the time of demutualisation. I recall that one insurer for e.g. had a 60/40 split. The point is that 1/9 is the most typically found shareholder/policyholder split.

The 1/9 cost of bonus is mathematically equivalent to 1/10 of surplus.
Example
surplus generated = 100
10% of surplus = 10 (shareholder)
90% of surplus = 90 (policyholder)

what is 10/90...

 

[Missannuity]

Ah ok, thanks. So why do we not distinguish between investment and non-investment surplus in a 90/10 fund?

 

[mugono]

Ah ok, thanks. So why do we not distinguish between investment and non-investment surplus in a 90/10 fund?

the reason why will become clear if you take a moment to fully absorb all of the above. Why is such a distinction important in a 90/10 fund...

 

[almost_there]

Thanks for clearing that up mugono

 

[Missannuity]

I thought the whole point was that the distinction between inv and non-inv surplus is NOT important in a 90/10 fund? Sorry for so many questions but I'm confused, and the notes don't make it clear either!

 

[almost_there]

So it appears 90/10 refers to the split of all surplus (investment & non-investment) between policyholder and shareholder, while 0/100 refers to the split of surplus (non-investment only) for shareholders only.

 

[mugono]

I thought the whole point was that the distinction between inv and non-inv surplus is NOT important in a 90/10 fund?

that's right