Show me the money?

We spoke to Francois Marais at Sanlam, had some thoughts on the questions posed by the PFA, in his recent ruling concerning smoothed bonus products.

The questions should be read in the context of the latest PFA ruling:

1. Where do all the profits go?

A :It is incorrect to call it "profit". The accumulated stabilisation reserve always belongs to the pool of policyholders in the smoothed bonus portfolio and has nothing to do with the profit of the insurer.

2. What happens to the accumulation of the funds (now swelling the stabilisation reserves in the insurers books) where there is no market adversity for many successive years?

A: It gets declared as increased bonus rates. The maturity values of smoothed bonus policies compare well to the values of market related policies over time. When the market falls the value of market related policies drop and, smoothed bonus policies may have higher maturity values than market related policies.

When the market increases, the value of market related policies will increase immediately, while the smoothed bonus policies will increase smoothly with the annual increase in bonus rates. Competitive market forces ensure that companies declare the highest bonus rates that they can afford with financial soundness.

3. Does it remain in the insurers stabilisation reserve until years of negative returns come along, and is it then used to top-up the policy values of remaining policyholders?

A: Yes, that is the purpose of maintaining a stabilisation reserve when markets are high (as opposed to declaring all the investment growth as bonuses)

4. Is it shared between remaining policyholders, on the one hand, and the insurers shareholders at the end of the insurers financial year, on the other?

A: No, it only belongs to the policyholders. The shareholders must, however, stand in for the loss if the market crashes to such an extent that the market value of the fund is less than the book value based on all vested bonuses (i.e. excluding any unvested bonuses)

5. Or is it treated as a profit and declared as a dividend for the benefit of the insurers shareholders?

A: We reserve the right to edit his comment here, and we took up that right.

Editors thoughts:
* As usual Francois deals with the questions directly.
* One wonders whether the PFAs understanding is indicative of a larger issue, and that is the fact that these and other financial services products have been over-engineered and have thus become too complicated, and perhaps too expensive?