§ Mr. StephenTo ask the President of the Board of Trade what is his Department's approach to the balance between the policyholders' and shareholders' interests in the long-term funds of life insurance companies.
§ Mr. Jonathan EvansA number of with-profit life offices have accumulated amounts within their long-term funds whose allocation between the shareholders and policyholders may not be clearcut; and there has been a growing interest among relevant companies in the scope for clarifying shareholders' interest in the long-term fund.
The Department is in principle in favour of greater clarity in the attribution of the long-term funds of proprietary insurance companies. In any such attribution, it has a responsibility to ensure that the reasonable expectations of policyholders are fulfilled.
The Department considers that policyholders' reasonable expectations in respect of attribution of surplus are influenced by a range of factors, notably:
361WThe fair treatment of policyholders vis a vis shareholders;Any statements by the company as to its bonus philosophy and the entitlement of policyholders to a share in profit, for example, in its articles of association or in company literature;The history and past practice of the company;General practice within the life insurance industry.The Department is concerned that any restructuring of funds for the purpose of clarification should preserve a proper balance of interests as between policyholders and shareholders. In this connection, it considers that the proportion of policyholders' and shareholders' interests in the surplus are unaffected by whether or not the surplus is actually distributed—that is, if in any year surplus is not distributed but is retained in the fund, the policyholders as a class retain their interest in that element of the fund.
A life office may make distributions from surplus in the long-term fund as shown by the statutory annual actuarial valuation. It is common practice to make distributions to policyholders and shareholders in the proportion 90:10. In assessing policyholders' reasonable expectations, the Department would expect this ratio to he used as the basis of attribution between the policyholders and shareholders, unless there was clear evidence, based on a company's circumstances, statements or practice, that a different proportion was appropriate in respect of the surplus arising from some particular part of the business.
The Department considers that the proposal announced today by United Friendly Insurance to restructure its long-term funds is consistent with these principles. It has reached this view on the basis of information provided about the history and practice of the company, the amount of accumulated reserves to be set aside for the benefit of with-profit and other policyholders—a part of which is being used immediately to declare a special bonus to policyholders—and the intended arrangements for the future distribution of surplus arising in the long-term funds.
The Department will assess any similar proposals from other life offices having regard to the facts of the case and the principles described above. The outcome in any specific case will depend on the history and circumstances of the fund, which may differ widely from company to company.