Chapter 9-10: With-Profits Surplus Distribution

Methods of distributions surplus

• Adding to benefits

• Cash refund

• Reducing future premiums

Key considerations when distributing surplus

• How much surplus it can afford to distribute

• Split of surplus between shareholders and policyholders

• How to divide surplus between different groups of policyholders

• Policyholders reasonable expectations

• Requirements for equity between different policyholders

• Not to interfere with new business plans, solvency or investment strategy

Factors to consider when comparing WP bonus methods

• Flexibility in awarding benefits

• Smoothing of bonusses

• Investment freedom

• Deferral of distribution (ability to deal with adverse experience)

• Equity

• Simplicity

Methods of distributing bonuses on WP contracts

• Revalorisaton:

  • Increase reserves, benefits, and premiums by x%

  • Usually divided into investment (mostly for policyholders) and insurance (mostly for shareholders) profit.

• Contribution method dividends:

  • Each policy receives a share of surplus based on their contribution to that surplus

  • Tries to quantify where profit merges from and then allocate bonuses using that

Advantages of revalorisation

• Simple to apply

• Little judgement required from company

• Emergence of investment profits is smooth due to method of calculation of asset values

Disadvantages of revalorisation

• No discretion in surplus distribution

• Not easy to explain to constant premium policyholders when revalorised premium policies see much larger increases in benefits.

• Equity investment discouraged due to no deferral of profit distribution (solvency risk)

• Against principle of mutuality since no sharing of insurance profits

• Treatment of unrealised gains problematic.