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Retaining surplus reducing the level of guaranteed policyholder benefit

0 votes
asked Oct 13 in BUS 4027W - Actuarial Risk Management by rohin_jain (980 points)

In chapter 46, one of the sources of internal capital is deferring surplus distribution and retaining surplus. 

It mentions that doing this will reduce the level of guaranteed policyholder benefits, and hence the capital required. 

I am not sure why this is true

1 Answer

+1 vote
answered Oct 16 by Rowan (4,010 points)
Hi Rohin

This statement refers to the specific case of with-profits policies, operating on the assumption that bonuses are not paid immediately, but rather increase the amount of the benefit which will be paid when it falls due. This means that if the company does not distribute the surplus immediately by deferring the bonus, they will also be deferring the increase in expected benefits. This in turn means that they will not have to hold the extra reserves which would have been required to cover the higher level of benefits, freeing up that capital for other uses in the interim.

It is important to note that the actual surplus itself still belongs to the policyholders, so it is not the surplus which is being used as additional capital.

commented Oct 17 by rohin_jain (980 points)

Hi Rowan

Thanks for the explanation. This makes sense. I just want to confirm that increasing the benefit amount which will be paid later will not increase your reserving requirements right now? But this reserving requirement will increase as we approach the benefit payment. 

commented Oct 17 by Rowan (4,010 points)

Hi Rohin

It will depend on the type of benefit. If it is a contingent benefit then the required reserve will be effected immediately to the extent that the benefit could fall due in the near future.