View source for Definition:Bonus

🎁 '''Bonus''' in the insurance industry refers to an additional amount credited to a [[Definition:Life insurance | life insurance]] or [[Definition:Endowment policy | endowment]] policyholder's benefits, typically derived from the [[Definition:Insurance carrier | insurer's]] distributable surplus — that is, profits generated from [[Definition:Investment income | investment returns]], favorable [[Definition:Mortality | mortality]] experience, or [[Definition:Expense | expense]] savings relative to the assumptions priced into the policy. The term is most closely associated with [[Definition:With-profits policy | with-profits]] (or "participating") business, a product structure deeply rooted in the United Kingdom, Continental Europe, parts of Asia, and other markets where policyholders share in the insurer's financial performance. While the word "bonus" appears in employment and compensation contexts across all industries, within insurance it carries a precise technical meaning tied to policyholder profit-sharing mechanics.

⚙️ Bonuses generally take two forms. A [[Definition:Reversionary bonus | reversionary bonus]] (sometimes called an annual or regular bonus) is declared periodically — often annually — and, once added, becomes a guaranteed part of the policy's [[Definition:Sum assured | sum assured]]; it cannot be taken away even if future investment performance deteriorates. A [[Definition:Terminal bonus | terminal bonus]] (or final bonus) is paid only when the policy matures or a [[Definition:Death benefit | death claim]] arises, and it is not guaranteed — insurers adjust it to reflect actual accumulated surplus at that point in time. The balance between reversionary and terminal bonuses is a strategic lever for insurers: a higher proportion of terminal bonus gives the company more flexibility to manage the [[Definition:With-profits fund | with-profits fund]] through volatile markets, while generous reversionary declarations strengthen policyholder loyalty but lock in long-term obligations. Regulators in markets such as the UK (through the [[Definition:Prudential Regulation Authority (PRA) | PRA]]), Singapore, and Hong Kong set expectations around the fairness and transparency of bonus declarations, requiring [[Definition:Appointed actuary | appointed actuaries]] to certify that distributions treat policyholders equitably.

💡 The significance of bonus declarations extends beyond individual policy payouts to an insurer's broader financial stability. Because reversionary bonuses are irrevocable, a prolonged period of generous declarations followed by an investment downturn can strain an insurer's ability to meet guaranteed benefits — a dynamic that has prompted regulators worldwide to impose tighter [[Definition:Solvency | solvency]] testing on participating funds. For policyholders, understanding the bonus mechanism is essential: a with-profits policy's ultimate value depends heavily on the insurer's investment strategy, expense management, and bonus philosophy, all of which are documented in the company's [[Definition:Principles and practices of financial management (PPFM) | principles and practices of financial management]]. As the industry transitions to [[Definition:IFRS 17 | IFRS 17]], the accounting treatment of participating contracts — and the surplus available for bonuses — has attracted renewed actuarial and investor attention, given the complex interplay between the [[Definition:Contractual service margin (CSM) | contractual service margin]] and policyholders' share of returns.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:With-profits policy]]
* [[Definition:Reversionary bonus]]
* [[Definition:Terminal bonus]]
* [[Definition:Participating policy]]
* [[Definition:Sum assured]]
* [[Definition:Appointed actuary]]
{{Div col end}}