Non-guarantee benefits

The last cashflow to introduce is non-guarantee benefits.

Whist all the benefits we have mentioned in (3) are guarantee benefits that insurers have the obligation to follow, there are non-guarantee benefits that the insurance company do not have a straight obligation to pay. It can either be in form of discretionary bonus, or using some ring-fence rule to pay a certain percentage of surplus to the policyholders.

Non-guarantee benefits have different variations. The simplest form is a "cash dividend", which pays policyholders a dividend if he survives to certain age. This is like a " non-guarantee" version of coupon benefit.

\begin{equation}
\begin{split}
CASH\_DIV\_PP _t & = FA × POL\_VAL\_TBL(DIV, t) × DIV\_ADJ _t \\
DIV\_OUTGO _t & = CASH\_DIV\_PP _t × NOP\_IF
\end{split}
\end{equation}

DIV_ADJ is dividend adjustment. The company may adjust the original planned dividend (which is set during pricing) using this adjustment factor in the future if there are any unexpected favorable / unfavorable events that boost up / deteriorate profits. That's why dividend is "non-guaranteed" because it is subjected to adjustment.

Except cash dividend, there are terminal dividend which is paid upon termination events, like death or surrender. The formula is similar:

\begin{equation}
\begin{split}
TB\_DTH\_PP _t & = FA × POL\_VAL\_TBL(TB\_DTH, t) × TB\_ADJ _t \\
TB\_SURR\_PP _t & = FA × POL\_VAL\_TBL(TB\_SURR, t) × TB\_ADJ _t \\
TB\_MAT\_PP _t & = FA × POL\_VAL\_TBL(TB\_MAT, t) × TB\_ADJ _t \\
\\
TB\_DTH\_OUT _t & = TB\_DTH\_PP _t × NO\_DEATHS \\
TB\_SURR\_OUT _t & = TB\_SURR\_PP _t × NO\_SURRS \\
TB\_MAT\_OUT _t & = TB\_MAT\_PP _t × NO\_MATS
\end{split}
\end{equation}

Cash dividend can be saved in the insurance company to form Dividend on Deposit (DoD). There is also another form of non-guarantee benefit called Revisionary Bonus (RB). We will introduce them in later chapters.

Using the same decrement model we used before, let's calculate the dividend outgo.

DIV_ADJ_PC = 80%

Year 1

DIV_PP = FA * POL_VAL_TBL(Div, 1) / NO_OF_UNITS * DIV_ADJ_PC = 500 * (0/1000) * 80% = 0

DIV_OUTGO = DIV_PP * NOP_IF = 0 * 0.899835 = 0

Year 2

DIV_PP = FA * POL_VAL_TBL(Div, 2) / NO_OF_UNITS * DIV_ADJ_PC = 500 * (0/1000) * 80% = 0

DIV_OUTGO = DIV_PP * NOP_IF = 0 * 0.854540 = 0

...

Year 10

DIV_PP = FA * POL_VAL_TBL(Div, 10) / NO_OF_UNITS * DIV_ADJ_PC = 500 * (50/1000) * 80% = 20

DIV_OUTGO = DIV_PP * NOP_IF = 20 * 0.776870 = 15.54

A demonstration spreadsheet showing the calculation above can be downloaded here:

https://drive.google.com/file/d/0B4OirwHLcmE1ZVI4Mi15bFdPRXM/view?usp=sharing