With-Profits: How were/are/will bonus rates (be) determined? Fudged language ?

agarnett

Our overall aim is to make sure that all guarantees are met and that all policyholders are treated fairly. Future bonuses can not be guaranteed as they come from profits that have not yet been earned. This means that it is possible that no bonuses will be added.

Regular bonus rates for conventional policies

We set regular bonus rates for conventional policies at levels which the with-profits funds can afford and which are likely to be stable in the long term. We take into account what we expect to pay out for existing policies in the future.

Regular bonus rates for unitised policies
To determine regular bonus rates on unitised policies, we estimate the expected underlying investment return of the assets in the with-profits funds. This is an investment return that varies with long-term changes in economic circumstances or our investment strategy, but fluctuates less than market returns. We make certain deductions from this return, including allowances for expenses, tax, and our shareholders' profit. A margin may then be taken off if we believe that these returns are not what we expect to earn in the long term.

Regular bonus rates for conventional and unitised policies

To determine regular bonus rates for conventional and unitised policies, we estimate the future return we expect to earn in the long term on the assets of the fund. Regular bonus rates are then set taking this into account, together with other factors such as tax and expenses. Our aim is to allow a big enough margin to pay final bonus on most policies of each particular type when they end. If we consider that the expected final bonus is too low then we will reduce regular bonus rates (if necessary to zero). Similarly, if we consider that the expected final bonus is too high then we will increase regular bonus rates.

For some unitised policies there is a guaranteed rate of interest. Your policy documents tell you if this applies to your policy. For those policies we may also set a regular bonus which will be paid on top of this guaranteed interest.

Final (Terminal) bonus rates for conventional and unitised policies
We normally review final bonus rates twice a year. However, final bonus rates can change at any time and we may review them more frequently if there are large changes in investment markets.

To determine final bonus rates on conventional and unitised policies we group similar policies together. We compare the total guaranteed benefits with the total asset share of the group.

Asset share
The asset share is an amount we work out for a policy by looking at how much has been paid into the with-profits funds and the investment returns earned in respect of the policy. We then take away certain deductions which include expenses, tax, our shareholders' profit, and the cost of providing the agree benefits for the policy (such as death or sickness benefits).

Hands up who understands the above and believes it is written in consistent language ? Anyone ? Don't be shy!

TrickyDicky101

It's written by actuaries - I'm sure they find it easy to understand.

Loughton_Monkey

I broadly understand it, but I worked in the industry.

There is always a problem, of course, when using 'Plain English' because courts and legal people can decide only on what's written down. Different people will have different interpretations whenever there is ambiguity.

However, the wording you quote seems to be an "explanation" which has no legal effect. It could therefore have been written in a much clearer way with no problem. Ironic really.

What they are saying, really, is "Don't worry. We bung your money into investments, and then steal our profit and expenses, after which we bung it back to you, the policyholder, every year. But don't worry, because whichever type of policy you have, we make it fair between individual policyholders. Especially since we hold a bit of it back so that when your policy matures, when we have all the facts, we will do a final calculation and throw you the 'correct' amount.

dunroving

agarnett wrote: »

Our overall aim is to make sure that all guarantees are met and that all policyholders are treated fairly. Future bonuses can not be guaranteed as they come from profits that have not yet been earned. This means that it is possible that no bonuses will be added.

Regular bonus rates for conventional policies

We set regular bonus rates for conventional policies at levels which the with-profits funds can afford and which are likely to be stable in the long term. We take into account what we expect to pay out for existing policies in the future.

Regular bonus rates for unitised policies
To determine regular bonus rates on unitised policies, we estimate the expected underlying investment return of the assets in the with-profits funds. This is an investment return that varies with long-term changes in economic circumstances or our investment strategy, but fluctuates less than market returns. We make certain deductions from this return, including allowances for expenses, tax, and our shareholders' profit. A margin may then be taken off if we believe that these returns are not what we expect to earn in the long term.

Regular bonus rates for conventional and unitised policies

To determine regular bonus rates for conventional and unitised policies, we estimate the future return we expect to earn in the long term on the assets of the fund. Regular bonus rates are then set taking this into account, together with other factors such as tax and expenses. Our aim is to allow a big enough margin to pay final bonus on most policies of each particular type when they end. If we consider that the expected final bonus is too low then we will reduce regular bonus rates (if necessary to zero). Similarly, if we consider that the expected final bonus is too high then we will increase regular bonus rates.

For some unitised policies there is a guaranteed rate of interest. Your policy documents tell you if this applies to your policy. For those policies we may also set a regular bonus which will be paid on top of this guaranteed interest.

Final (Terminal) bonus rates for conventional and unitised policies
We normally review final bonus rates twice a year. However, final bonus rates can change at any time and we may review them more frequently if there are large changes in investment markets.

To determine final bonus rates on conventional and unitised policies we group similar policies together. We compare the total guaranteed benefits with the total asset share of the group.

Asset share
The asset share is an amount we work out for a policy by looking at how much has been paid into the with-profits funds and the investment returns earned in respect of the policy. We then take away certain deductions which include expenses, tax, our shareholders' profit, and the cost of providing the agree benefits for the policy (such as death or sickness benefits).

Hands up who understands the above and believes it is written in consistent language ? Anyone ? Don't be shy!

I think I can interpret one part:


Terminal bonuses - these can be anything from next to nothing upwards and you won't know until you get to the end what yours will be. This way, we hope you won't stop paying in, or try to sell your policy, in the hope that at the end a miracle might happen and you will get a terminal bonus that will buy more than a bar of Cadbury's Dairy Cream.

sandsy

I understand it but it's not well written. But my industry background gives me a distinct advantage.


To add, I can guarantee you that there would have been several iterations of the text, backwards and forwards between the actuaries and marketing and comms, before the above was settled on!

agarnett

I can't understand it. I became a Fellow of the Chartered Insurance Institute by examination over 30 years ago.

My principles and practice may have become a little old-fashioned. So can anyone current in the industry update me please on the most likely meanings of these words as I would like to know how my with-profits contracts are performing and can't plot any bonus pattern?

coyrls

I think it means "trust us, we will balance looking after you and the other policy holders while taking what we consider a fair payment for ourselves". I think these policies could work in the days where you could place some trust in financial institutions, particularly Mutual Societies. Having been burned by Equitable Life, I know those days are long gone (if they ever really did exist).

agarnett

Yes coyrls, the words could mean that, and I believe you are right about both the intention to reassure and the real intention to burn.

These words are not original policy words. They are much more recent, and my pensions due to reach NRA inside fewer years than on one hand depend on them - but they are of no use to me in planning how the plan will work based upon such words for me or for anyone else because the providers keep changing things for their own benefit.

So I ask again, could someone current in the industry tell me what the words actually mean, and what the real risks inherent in such wordy assurances / warnings / soft advices from the insurance company might actually be at this late stage of a long term insurance/pension contract from a major provider.