PARTICIPATING

LIFE INSURANCE
CONTRACT

INTRODUCTION
CONVENTIONAL PARTICIPATING/ WITH-PROFITS CONTRACTS
Policy where the policyholder are guaranteed a certain level of
benefit (the sum assured) in return for the payment of fixed single
or annual premium.
Policyholder has an entitlement to part or all of any future surplus
which arises under the contract. (Participate in the profits earned
by the fund.

OPERATIONS OF THE FUND

Figure 1: The operation of a with-profits fund

* is the proportion of distributed profit which is attributed to the

What Type of Surplus for Distribution ?

Excess investment return on the premiums paid, over and above
the guaranteed return.
Profit from mortality or expense experience being better than
allowed for.
Some of this surplus may have arisen from non-participating
(ie without-profits or unit-linked) policies.

Possible Ways of Distributing Profits

Premium
Reduction

Cash Bonus

Addition to
benefit Method

Benefit
Increase

Revalorization
Method

Contribution
Method

Possible Ways of Distributing

Profits

Cash Bonus
Premium
Reduction
Benefits
Increase

As a cash/ dividends to the policyholder

As a reduction to the premium payable
during the next year.
The reduction would be equal to the
amount of cash that would have been
payable in cash bonus
To be used as a single premium to purchase
additional contractual benefit
The bonus is left in the fund to accumulate
on deposit
To be used as a single premium to purchase
additional death benefit i.e 1 year term
assurance

Distributions Method - Additions to Benefits

Method
Conventional With-Profits
The initial guaranteed sum assured (basic benefit) may be increased
by bonuses of three kinds:
Regular reversionary bonuses, added throughout the contract
term.
A Special Reversionary bonus, added as a one-off from time to
time.
A Terminal Bonus, paid when the contract reaches maturity and
possibly also on death or surrender.
The distributed profits are paid out along with the original sum assured
when there is a contractual claim under the contract, for example at
death or maturity.

Distributions Method - Additions to

Benefits Method
A regular reversionary bonus is a reversionary bonus that
is declared on a regular basis, usually each year,
throughout the lifetime of a contract.
The amount of bonus can be calculated 3 ways
i. Simple bonus - is expressed as a percentage of the basic
benefit under the contract
ii. Compound the bonus is expressed as a percentage of the
basic benefit plus any already attaching bonuses.
iii. Super compound the bonus is expressed in terms of two
percentages , one applied to the basic benefit and a
second applied to any already attaching bonuses. Typically,
the second percentage is higher than the first.

Distributions Method - Additions to Benefits

Method
The amount of Reversionary Bonus can be calculated 3 ways:

bt is the bonus rate declared for year t

S is the guaranteed sum assured under a policy
Bt is the total reversionary bonus for year t
NBt is the new bonus for year t
i.

Simple bonus > NBt= bt S

ii. Compound > NBt= bt ( S + Bt)

iii. Super compound > NBt= b(s)t S + b(b)t Bt

Distributions Method - Additions to Benefits

Method
Example 1:
Compare the build up of sum assured over the lifetime of a 15-year policy with the following alternative methods,
assuming an initial sum assured of 10,000:

simple bonus at 5% pa
compound bonus at 3.9% pa
super compound bonus at 3% pa on basic sum assured, 7.5% pa on bonuses

Year
Sum Assured
SB
CB
SCB

Distributions Method - Additions to Benefits

Method
Special Reversionary Bonus
A company may declare part or all of a reversionary bonus as a oneoff special, in addition to any regular reversionary bonus that it is
giving. This may, for example, occur as the result of restructuring a
with-profits fund.

Distributions Method - Additions to Benefits

Method
Terminal Bonus

The amount of terminal bonus is determined when the insured event

occurs. (constantly changing bonus)
It defers the distribution of surplus until the end of the contract, and so
slows down the build-up of guarantees under the contract.
The bonus to give to particular contact may be specified in a number of
different ways: (Refer to the Example 2)
i. A percentage possibly varying by duration in force and original term
of contract (total of attaching reversionary bonuses including any
special reversionary bonuses.
ii. A percentage of the total claim amount before addition of terminal
bonus, with percentage varying according to duration in force .

Distributions Method - Additions to Benefits

Method
Example 2:
Twenty-five year with-profits endowment assurance, maturing now
Guaranteed sum assured (basic benefit): RM5,000
Attaching reversionary bonus: RM5,950
Terminal bonus as a percentage of reversionary bonus only: 58%
Terminal bonus as a percentage of sum assured plus reversionary
bonus: 31.5% Terminal bonus in either case: RM3,450
Total payout in either case: RM14,400

Distributions Method - Additions to Benefits

Method
Accumulating With-Profits

Bonus are added annually in relation to the premiums payable to date

plus previously declared bonuses.
A terminal bonus maybe added when the policy becomes a claim n
maturity, death or surrender.
The most common form of such contracts is what is described, for
marketing purposes, as a unitised with-profits contract.
A non-unitised accumulating with-profits contract can look and
operate very much like a conventional with-profits contract with
recurring single premiums.

Distributions Method - Additions to Benefits

Method
Accumulating With-Profits

The following shows the relationship between policy benefit values:

Ft+1 = ( Ft + Pt ct ) (1 + bt)
where:
Ft = policy benefit (excluding terminal bonus) at policy time t; F 0 = 0
Pt = premium paid at policy time t
ct = charge deducted at time t
bt = regular bonus added between times t and t +1.

Distributions Method - Revalorisation

Method

The profit to be given to a particular contract is expressed as a

percentage of, r%, of that contract supervisory reserve. (the
amount distributed to a policy with current reserve Vt would be
rtVt
There are two methods of distributing this amount to
policyholders; first is to increase both the policy benefits and the
future premiums by the same proportion rt .
Thus, the benefit under the contract and the premium payable by
the policyholder are increased by the same amount.
The profit of the life insurance company is divided into saving
profit and insurance profit.

Distributions Method - Revalorisation

Method
The saving profit represents the profit from asset and can be
distributed by revalorisation method.
The insurance profit is that arising from actual experience being
better than expected for all sources of profit other than the return
on the asset.
This insurance profit typically be retained by company for
distribution to shareholders.

Distributions Method Contribution

Method

The contribution principle, which underlies this approach,

is that distributable surplus should be distributed among
policies in the same proportion as those policies are judged
to have contributed to surplus.

Distributions Method Contribution

Method

The dividend given to a particular contract is calculated using the

following formula:

The gross premium in the policy above is the actual premium paid by
the policyholders.

Distributions Method Contribution

Method
The three components of the formula:

Excess interest on the {reserve plus premium}, ie interest surplus.

(The premium is assumed payable annually in advance in this
formula.)
The expected death strain less the actual death strain, ie mortality
surplus.
Excess of expected expenses over actual expenses, accumulated
to the end of the year, ie expense surplus.

Discussion

1. Give and example of a risk that may be higher for a with-profits

policy than for an equivalent without-profits one.
2. Why not simplify the system and allocate bonus only as terminal
bonus, with no reversionary bonus?

Case Study
The following example illustrate on how a conventional with-profits fund
operates.

Case Study
Assumptions:
10,000 identical policies are issued at time t=0
The actual experience is exactly the same as that expected
according to the premium basis.
The benefit paid on death during the policy year t will be equal to
Bt = (SA) x (1 + RB at time t) x ( 1 + TB)
The accumulation of the fund is described by the following formula
Ft+1 = Ft + Pt + It Et Ct
Where,
Ft the assets (fund) accumulated by the beginning of year t and
Pt , It , Et , Ct the total premium income, investment income,
expenses and claim
outgo incurred during year t

Case Study
The Annual Office Premium = RM142.95

Fill in the blank and produce the solutions by using excel. Show
the working for the annual office premium. (10% Assignment
Marks) Due Date 23/2/15