Constraints on discretion: Distributing surplus in with‐profits life insurance
| Date | 01 June 2004 |
| DOI | https://doi.org/10.1108/13581980410810731 |
| Published date | 01 June 2004 |
| Pages | 118-127 |
| Author | Chris O’Brien |
Constraints on discretion: Distributing
surplus in with-profits life insurance
Chris O’Brien
Received: 16th February, 2004
Centre for Risk and Insurance Studies, Nottingham University Business School, Jubilee Campus,
Wollaton Road, Nottingham, NG8 1BB, UK; tel: +44 (0)115 846 6519; fax: +44 (0)115 846 6667;
e-mail: christopher.obrien@nottingham.ac.uk
Chris O’Brien is director of the Centre for
Risk and Insurance Studies at Nottingham
University Business School. He was for-
merly an appointed actuary of a UK life
insurance company. He has written sev-
eral articles on actuarial matters and on
the operation of the life insurance market.
His research interests include insurance
accounting and the assessment of insur-
ance company performance; insurance
regulation and the efficiency of insurance
markets; and the application of actuarial
techniques.
ABSTRACT
KEYWORDS: actuarial profession,
bonuses, Equitable Life, Financial Services
Authority, life insurance
When Equitable Life went to court in a case
concerning the bonus rates it applied to pension
policies with guaranteed annuity options, it
emphasised that its rules gave it wide discretion
in its bonus decisions, an argument that was
unsuccessful.
This paper considers the constraints on the dis-
cretion available to life insurers in the way they
determine bonuses on with-profits policies. It
reviews four previous court cases concerning with-
profits policies: in one of these, the insurer lost.
The Financial Services Authority has now
taken on board the need for life insurers to
describe their bonus practices far more fully.
That will help lead to a more precisely defined
contract between policyholders and insurers. It
is also proposing new rules, which should
reduce the potential for discretion to be abused.
The paper also considers the actuarial profes-
sion, whose members have the responsibility of
making recommendations to life insurers about
bonuses. It suggests there may be benefit if the
profession can go beyond the limited guidance
on bonuses it has issued, to develop and publish
best practice in the bonus declaration process.
INTRODUCTION
‘With-profits’ life insurance policies came
about over 200 years ago. Equitable Life, a
mutual life insurer in the UK, had accumu-
lated a substantial surplus of assets over
liabilities, as a result of the mortality
experience of its policyholders being more
favourable than the society had assumed
when setting its premium rates. It therefore
decided in 1781 that it would increase the
sum insured on the policies in force, by an
amount equal to 1.5 per cent for each year
the policy had been in force, subject to a
maximum of 28.5 per cent.
1
It subse-
quently became the practice of life insurers
to issue policies that explicitly participated
in the profits of the company. At intervals,
the directors would assess the assets and
liabilities of the company, and use some or
Page 118
Journal of Financial Regulation and ComplianceVolume 12Number 2
Journal of Financial Regulation
and Compliance, Vol. 12, No. 2,
2004, pp. 118–127
#Henry Stewart Publications,
1358–1988
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