It could have argued that a poor company would have
the opposite results in these three areas.
It follows, therefore, that the successful company is
able to build up a large fund which will be more than enough to pay
claims as they arise. Every few years, or sometimes every year, a
company will calculate the amount of money needed now to pay future
claims and compare that with the funds they have available now. When the
latter is greater than the former what is known as a 'surplus' arises
and a large part of this can be returned either to policyholders in a
mutual company and shareholders in a proprietary company.
Policyholders share in this surplus if they have
contracted to take 'with profits' policies. In most cases these are
'endowment assurance' and 'whole life assurance' policies where the
policyholders are paying higher premiums to give them the right to
participate in the surplus distribution. A successful company will
consistently have high amounts of surplus bringing additional benefits
to its policyholders in the form of bonus additions to their policies.
These bonuses are usually in the form of
'reversionary bonuses', which means they will be paid with the
guaranteed sum assured when a claim is made. Most companies nowadays
declare a reversionary bonus each year and an addition is made to each
policy; usually so much per cent of the sum assured on the policy. This
is known as a 'simple bonus', in contrast to a 'compound bonus', where
the bonus is allotted using the basis of the sum assured and existing
In recent years companies found that good investment
conditions were producing higher returns than they might expect and
further additions are often now made when policies become claims. Again
a percentage of the benefits under the policy is added when the claim is
paid. This addition is called 'terminal bonus' but unlike the regular
'reversionary bonus' which tends to increase gradually over the years
the 'terminal bonus' will reflect current investment conditions at the
time it is declared.
Companies use their record of bonus additions as a
sales point and there is keen competition to stay top-of-the-league in
||Currently many of the mutual companies are
giving up their mutual status. This has the effect of making the balance
of surplus funds available to the with-profit policyholders rather than
it being held in reserve.