Chapter 15- South African Surplus Distribution Requirements Flashcards Preview

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Flashcards in Chapter 15- South African Surplus Distribution Requirements Deck (5)
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outline the considerations regarding equity for both with and without profit contracts? (5)

• The main requirement of a surplus distribution system is that it should be equitable (fair or just)

• If the policy is not with-profit contract governed by principle and practices of financial management (PPFM) the equity will be met if the contractual terms of the policy and followed

• Equity is more complex when discretion is given to the board of the company who are advised by the actuary

• Actuaries needs to ensure that the interest of all parties (policyholders and shareholders) are considered and are appropriately balanced

• The actuary also needs to consider if the discrimination is fair and justified


Outline horizontal equity considerations in surplus distribution? (3)

• This means that similar policyholders should be treated fairly (required by the LTIA)

• Policyholders with similar policy terms, policy durations and rating factors will be grouped together for the purpose of bonus allocations

• The policy regarding which experience is pooled and how surplus is allocated needs to be approved by the board and should not be changed without good reason


Outline vertical equity considerations in surplus distribution? (2)

• Vertical equity means that where there are distinctions in allocations between classes of polices the effect of distinction are proportional to the differences

• The smoothing of pay-outs may be seen as an attempt to achieve vertical equity as they try not to distinguish between similar classes of policyholders over time (think about this)


outline how policyholder reasonable expectations influence surplus distribution? (4)

• The south African courts have accepted that equity is maintained of policyholder’s reasonable benefit expectations are maintained

• The RBE’s have also been incorporated into SAP 104 as well as APN 106

• RBEs can effective arise in the following ways:
o Relevant content in the policy contract
o Influenced by marketing and other literature e.g. bonus distribution philosophy
o Past practice regarding bonus distributions
o Market practice

• Actuarial fairness means that each policyholder should receive the surplus earned by his/her policy and the earned asset share should be paid out at maturity


outline financial and practical issues regarding surplus allocation? (8)

• Policyholder reasonable expectations will include some expectations regarding the investment strategy underlying asset share

• The system should be sustainable and not endanger the solvency of the company

• The system should take into account both regulatory and industry requirements including keeping consistent with principles and practices of financial management

• Consistent with basis in premium calculations and liabilities

• Easily understood by sales people, administration staff and policyholders

• Capable of accurate implementation (simplicity)

• Transferred policies usually contain safeguards such that surplus distribution is honoured

• Restriction in memorandum and article’s of association

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