Actuarial Notes

Mechanics of Dividends

By Dale Hagstrom · Society of Actuaries Research Institute · 2022

Study guides: Exam ILA-201I, Exam ILA-201U

A March 2022 Society of Actuaries Research Institute paper on policyholder dividends on traditional participating life insurance in regulatory contexts similar to those in the United States and Canada, with a brief touch on annuity products. It was prepared for the SOA's educational curriculum, and its sponsor is the Individual Life and Annuities Track Curriculum Committee.

On the syllabus

1 Introduction

2 How Dividends Work

  • 2.1 Process to set dividends
    • 2.1.1 Declaration by Board, after recommendation by management and/or dividend actuary
    • 2.1.2 Distribution to individual policies according to dividend scale adopted
  • 2.2 Payment Options
  • 2.3 Types of dividend methods and types of dividend formulas
    • 2.3.1 Common Dividend methods
    • 2.3.2 Illustrative Dividend Formulas
  • 2.4 Dividend framework
  • 2.5 Recognition of policy activity
  • 2.6 Handling one-time changes
  • 2.7 Constraints and context
    • 2.7.1 Allocation based on past contributions, but with an eye to the future
    • 2.7.2 Relationships between existing business in force and new business
    • 2.7.3 Effect on regulatory/statutory liabilities
  • 2.8 Case studies in increasing or decreasing the dividend scale
    • 2.8.1 Mixed Experience
    • 2.8.2 Deteriorating Experience
  • 2.9 Insurers of policies with dividends

3 Considerations

  • 3.1 Different concepts of “fair and equitable” may arise from different perspectives
    • 3.1.1 Unconstrained perspective is fundamentally retrospective
    • 3.1.2 Perspective may be broadened to improve ability of insurer to serve the public
    • 3.1.3 Perspective may be broadened to consider external challenges
    • 3.1.4 Perspective may need to consider the special circumstances of a Closed Block
  • 3.2 Other Considerations Beyond The Scope Of This Paper
    • 3.2.1 Related subjects and considerations not covered by this paper
    • 3.2.2 Other forms of nonguaranteed elements

4 Acknowledgments

Appendix: References and Related Reading

Sources