Study Notes and Published References - Note CIA Recommendations - DIVIDEND DETERMINATION AND ILLUSTRATION
Section 1 - General
- describe baseic responsibilities of actuary in application of sound actuarial principlas adn practices to determination adn illustration of divs under par pols
- Contribution Principle cannot be applied over longer term to stock companies unless
- possible to determine the surplus earnings of par business
- limitation on amount that may be transferred from part business and surplus to the shareholders acct
- Section 83 requires par and non-par blocks be maintained separately
- Section 84 limits distribution of par profits to shareholders
- general practice: maintain sep accts for par, non-par and suplus
- significantly restrict transfers from par surplus to shareholders acct
- report should describe method of determining surplus earning of par block and if stock, limitation on distribution of par profits to stockholders
- Recommendation does not address determination of divisible surplus
- Does Address
- determination of currently payable divs for pols inforce
- determining illustrated future divs for both inforce and NB
- Consider in Report
- an actuarial report is a statement of actuarial findings, conclusion, or recommendations
- any manner of transmittal of an actuarl report which involves teh risk that the underlying facts adn assumptions and limitations resulting from their use are not fully commented to teh client involves a corresponding risk that the conclusions or recommendation may be misinterpreted or misapplied
- the client is the co, its policy-making executives and in some situations its board of directors, whether or not he is an employee fo the ins co
- actuarial report should include such underlying data as are essential to findings or conclusions reported
- Recommendation 1
- Whenever an actuary advises an ins co on divs, either illustrated or current, he should prepare a written report which documents the advise
- "Sound Actuarial Principles" - generally accepted actuarial principles adn practices whiich emerge from utilization and adaptation of concepts described in actuarial literature
Section 2: The Contribution Principle
- Basic principle is to distribute teh aggregate divisible surplus among policies in the same proportion as teh policies are considered to ahve contributed to divisible suplus
- Recommendation 2
- use of Contribution Principle is generally accepted practice in Canada
- Actuary's report shoudl state if priciple followed
- if not followed, state deviations and rationale
Section 3: The Process of Dividend Determination
- application of Contribution Principle requires two basic types of elements
- policy factors - elemetns which reflect assumptions inherent in std against which experience is measured
- expereince factors - elements which reflect actual experience
- Methods of Div determination described in actuarial literature
- source of earnings method (contribution method)
- asset share method
- fund method
- experience prem method
- percentage of prem method
- reversionary bonus method
- other methods, including combos, mods to above, also describe in lit
- Recommendation 3
- Actuary's report shoudl include description of precess used to determine divs as well ans manner in which policy and exerience factors are flected in that process
- also describe the formulations used to calc divs
- Recommendation 4
- if impractical to apply Recommendations directly to all pols/benefits, may continue a div scale or use approximations or similar processes and formulations
- rationale and impact s/b disclosed in report
Section 4: Policy Factors
- elements based on guarnatees or underlying actuarial structure of policy
- Recommendation 5
- use of actual or approx policy factors is generally accepted practice
- describe policy factors and of any changes in practice w/r to determination for period covered by report
Section 5: Experience Factors
- actual experience - experience and trends to extent they are determinable, available, adn statistically credibe.
- if not available, interpret w/ sound professional judgement based on similar classes fo business from same co/other co/other sources
- if a trend is projected for one class, s/b make uniformly for all classes
- Recommendation 6
- report should describe experience factor values used
- if projection used, type and extent of usage s/b stated
- Recommendation 7
- if multiple factor classes, differences in factors between classes need to be based on differences in actual experience between teh two classes
- identify differneces and be prepared to provide a demonstration necessary to support such differences
- Recommendation 8
- report changes in experience factors and changes in practice w/r to determination of exp factor classes or placement of policies w/in them
Section 6: Claims Factors
- Recommendation 9
- if multiple claims factor classes, disctinction can be made on basis of
- risk selectin class
- selection process
- mktg method
- policy provisions
- plan
- prem rate
- geographic location
- size of policy
- date of policy issue
- variations s/b reported along w/ explanation of rationale and effect of basis
Section 7: Investment Income Factors
- includes int earnings reduced by investment expense, capital g/l
- effect of taxation may be reflected as reduction of before tax inv income
- investment income for a group of policies may be directly affected by pol loans
- Recommendation 10
- Generally accepted practice to reflect the effect of policy loans in inv income factors
- inv income, excluding policy loans, directly affected by
- amt and timeing of investable CF generated by ins operations of the group of pols
- inv income rates initally and subsequently applicable to CF due to investments actually made
- rate or follover of those investments, which affect investable CF insubsequent periods
- Recommendation 11
- use of either portfolio average approach or investment generation approach is considered generally acceptable practice
- report should state menthod used
- if method changed, or net method for new group of pols, describe nature, rationale adn effect
Section 8: Termination Factors
- terminations for reasons other than claims
- organized set of internally consisten experience factors corresponding to () will be considered one factor in defining a termination rate factor class
- () - IA,sex, prem mode, plan, size of pol
Section 9: Expense Factors
- mktg, u/w and other acq cost may be allocated to all pols or recognized specifically as non-level costs to be charged to a policy and amortized
- Recommendation 12
- direct costs s/b charged to group generating costs and indirect costs allocated
- amortization s/b based on realistic int and termination rates appropriate for group of pols
- considerable latitude in possible approaches for allocating indirect costs w/in various groups of pols
- amort periods and matters may also vary widely
- Recommendation 13
- minimum test of consistency between two expese factor classes is that any difference in total expense charged to each class s/b justifiable and in accordance w/ sound principles of expense analysis
Section 10: Tax and Other Factors
- tax factors may be incorporated into div determination
- Recommendation 14
- variation in tax factor should reflect corresponding variatino inherent in applicable law/regs imposing that tax
- stock co - charge for stockholder retention
- can be reflected at an aggregate level in determining divisible surplus
- can be separate factor in formula for div scale or implicitly included as part of one or more expense factors
- Recommendation 15
- Describe method used by co for shareholder retention charges
- if div scale contains specific expense factor for such charges, describe and detail and changes
- reasons for adjustments to divs
- reflect unusual g/l on certain supplemental benfit riders
- reflect losses arising from presence of settlement option guarantees
- smooth transition from one div scale to another
- provide consistency in quantity discounts made to varying degrees in GP structure
- serve as balancing item so aggregate divs = aggregate divisible surplus
- distribute gains from extraneous sources, such as non-par benefits or LOBs
- smooth incidence of divs w/in div scale by policy dur
- Recommendation 16
- specifically state any special adjustments made to divs
- be prepared to provide demonstrations which support existency adn magnitude of such adjustments
Section 11: Terminal Dividends
- generally reflect a POs share of surplus which has not been distributed through annual div
- terminal divs program may be part of recurring process or may be one time distribution for a limited period
- Recommendation 17
- state whether terminal divs equitably reflect incidence, size and growth of the policy's share of amts previously accumulated on behalf of policies on which such divs payable
- whether diffs in terminal divs among diff poliices reflect differences in corresponding amts accumulated
- whether terminal divs expected to be recurring and/or for temporary period
- describe proscess used to determine
- source of funds or types of inv gains used to support div
- changes in practice w/r to determination of terminal divs
Section 12: Determination of Participating Earnings Limitations on Amts Transferred Among Accts
- if separation of accounts not used, mvoing an amt from experience of par line to another line or to shareholders acct = transfer
- if contribution principle to be followed, transfers from one par line to antoher as important as transfers to shareholder's acct
- describe any such transfers
- Recommendation 18
- report if separation of accts maintained and if so, on Stat or GAAP basis
- Recommendation 19
- state if current limit exists on amts transferred from par to non-par/shareholder's acct
- Recommendation 20
- report (or incorporate by reference) current earnings and PO surplus of each par acct and amts proposed to be transferred to toher accts and distributed to PO
- state why transfers are reasonable/unreasonable
- whether (in actuary's judgement) transfers migh impair co's ability to maintain current div scale
Section 13: Illustrated Dividends
- methods intended to apply equally to currently payable divs adn illustrated future divs for inforce and NB
- may be desirable to assume a conservative position in determining experience factors applicable to only new or recent issues
- circumstances can arise wehn there is substantial probability that an illustrated div scale will not be maintained in near future
- may be appropriate to illustrate a reduced scale
- Recommendation 21
- actuary should conduct tests of illustrated divs to judge if these illustrated divs could be paid in teh near future
- if substantial probability that illustrated divs not supportable in near future, report should state such
- Recommendation 22
- report should identify time period used to determine portfolio inv generation rate of return for policies to which illustrated divs apply
- Recommendation 23
- primary responsibility w/r to illustrated divs - ensure divs appropriately reflect current financial results of co adn related to paid divs in an equitable, justifiable manner