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🎁 '''Reversionary bonus''' is a form of annual bonus declared by a [[Definition:Life insurance | life insurer]] on a [[Definition:With-profits policy | with-profits policy]], which, once added to the policy's guaranteed [[Definition:Sum assured | sum assured]], becomes a permanent, irrevocable entitlement of the policyholder. This mechanism is central to the with-profits tradition that originated in the United Kingdom and has been adopted in various forms across markets including Australia, India, Singapore, Hong Kong, and parts of Africa. Unlike a [[Definition:Terminal bonus | terminal bonus]], which is discretionary and paid only at maturity or claim, a reversionary bonus vests immediately upon declaration and cannot be taken away — even if the fund's investment performance deteriorates in subsequent years.

⚙️ Each year, the insurer's [[Definition:With-profits actuary | with-profits committee]] or [[Definition:Appointed actuary | appointed actuary]] evaluates the performance of the [[Definition:With-profits fund | with-profits fund]] and determines what level of reversionary bonus, if any, to declare. The bonus is typically expressed as a percentage of the sum assured (a "simple" reversionary bonus) or as a percentage of both the sum assured and previously accumulated bonuses (a "compound" or "super-compound" reversionary bonus). The compound approach accelerates growth over time but commits the insurer to larger guaranteed liabilities, which is why many firms have shifted toward lower compound rates or reverted to simple structures in recent decades. Once declared, the bonus increases the insurer's guaranteed [[Definition:Technical provisions | technical provisions]], meaning it must be supported by assets and [[Definition:Regulatory capital | capital]] under the applicable prudential regime — whether [[Definition:Solvency II | Solvency II]] in Europe, [[Definition:Insurance Regulatory and Development Authority of India (IRDAI) | IRDAI]] regulations in India, or other local frameworks.

📊 The reversionary bonus mechanism was designed to give policyholders a smooth, progressive share of investment returns while protecting them from the full volatility of financial markets. For insurers, however, the irrevocable nature of these bonuses creates a ratchet effect on liabilities — each declaration permanently raises the floor of guaranteed payouts. This tension between policyholder expectation of meaningful annual bonuses and the insurer's need to manage [[Definition:Asset-liability management (ALM) | asset-liability risk]] has been a defining challenge of with-profits management, particularly during prolonged low-interest-rate environments. The decline of reversionary bonus rates over the past two decades in the UK and other mature markets reflects both lower investment returns and a more conservative approach to [[Definition:Reserving | reserving]]. Nonetheless, with-profits business supported by reversionary bonuses remains a significant legacy book for many insurers, and the actuarial management of these guaranteed obligations continues to demand considerable expertise.

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

Definition:Reversionary bonus - Revision history

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