6Profit Carriers and Profit Margins

SECTION 6 Profit Carriers and Profit Margins

Overview

Policies are written with the expectation of producing profits. Profit Carriers are selected and Profit Margins determined when a policy commences to enable the appropriate emergence of the expected shareholder profit over the term of the benefits. (Policy owner profit emerges through Bonuses.) This is achieved as follows:

Profit Margin =

Value of future Best Estimate Shareholder Profits

divided by Value of Profit Carrier(s)

where the Profit Carrier is a financially measurable indicator of either:

 the expected cost of the services provided to the policy owner; or

 the expected income item relating to the services.

The range of services which may be provided to the policy owner, includes:

 insurance of mortality, morbidity (or similar risks)

 generation of investment income

 setting up the policy (selling or acquisition)

 ongoing administration

 investment management

 provision of bonuses

Selection of the profit carrier is critical in determining the magnitude and timing with which profits are released.

6.1 Profit Margins

6.1.1 In accordance with the principles of section 3, the appropriate release of expected future shareholder profits is provided for in valuing the policy liabilities, either explicitly or implicitly, through the incorporation of Profit Margins.

6.1.2 A Profit Margin must be expressed, explicitly or implicitly, as a uniform proportion of one or more appropriate Profit Carrier(s).

6.2 Profit Carriers

6.2.1 The appropriate Profit Carrier(s) must be related to the services provided to policy owners by the company. The Actuary, in selecting the appropriate Profit Carrier(s), must consider:

1. the services and income items applicable to the benefit; and
2. the relative risks of services, or of costs, to the company; and
3. the relative timing of the provision of the services and the receipt or recognition of income for those services.

6.2.2 Provision of capital to meet Solvency and Capital Adequacy Requirements is not a service for this purpose.

6.2.3 Acquisition is a service for this purpose only when explicit Establishment Fees are received.

6.2.4 The practical implications of selecting multiple profit carriers should be considered relative to the materiality of the results. Where multiple Profit Carriers are used, for ease of computation it may be desirable to retain a constant Profit Margin for all but one of the Profit Carriers selected, allowing the Profit Margin in respect of that remaining Profit Carrier to be the only variable.