The Impact of With-Profits Policy’s Mechanisms to Insurer’s Investment Strategy and Insolvency Risk

A 10-year single premium with-profits policy with different mechanisms, including with or without terminal bonus, smoothing bonus rate, surrender option and initial investment from the insurer, is simulated to find out the relation between the investment strategy, the proportion invested in stocks, and the real world insolvency risk of the insurance company. The result shows that comparing to the policy with surrender option, insurer’s insolvency risk is always higher than the policy without surrender option under same weight of investment in stocks. In the same time, no matter the policy is with or without surrender option, the initial investment from the insurer improves the most when only one mechanism is considered. When talking about the effects of multiple mechanisms, the policy with smoothing bonus rate or/and terminal bonus plus initial investment all overwhelms the policy with one mechanism used only. By analyzing the results and the differences of regulations and market practices of with-profits policies between the United Kingdom and Taiwan, the suggestions are the followings: The regulation of minimum bonus declared every year should be adjusted to ensure the fair treatment to policyholders. Insurance company in Taiwan should set separate fund for its with-profits business and disclose the investment strategy and bonus policy to its policyholders in a customer-friendly way. Policy with riskier asset allocation and lower guaranteed interest rate should be provided and properly introduced to the market.