Dividends

  • Origin of the Word "Dividend"
  • Mr. Winter points out that policyholder dividends are often confused with  shareholder dividends.
    • I urge the NAIC and policy form writers to drop "dividend" and use the synonym "bonus."
    • The courts have long recognized, however, that "policy dividends" are not equity payments. (See the Mutual Benefit and Penn Mutual cases in the bibliography of the paper and the article by Andre Pouy in the discussion bibliography.)
    • The word "dividend" has been used in the insurance industry to refer to nonguaranteed refunds or benefits for almost 300 years.

1983 - SOA - Universal Life and Indeterminate Premium Products and Policyholder Dividends, Society of Actuaries, by Thomas G. Kabele - 96p

  • Certainly customers are not going to be happy if they get a dividend considerably less than the dividend that has been illustrated.
    • That is a fact of life that we have to worry about and be concerned about.

--  Richard M. Stenson

1980 - SOA - Premiums and Dividends -- Participating Insurance, Society of Actuaries - 26p

  • II. REGULATORY REQUIREMENTS FOR LIFE INSURANCE ILLUSTRATIONS
    • The policy performance and features illustrated to the buyer have been an issue with regulators for at least a century.
    • At the turn of the century, there was concern about the tontine dividends that companies illustrated to their customers.
    • An outgrowth of the Armstrong Commission was the required annual distribution of dividends and the elimination of tontines based on survivorship.  (p143)

1991-1992 - SOA - Final Report* of the Task Force for Research on Life Insurance Sales Illustrations, Society of Actuaries  ---  [BonkNote]  ---  142p

  • Traditional plans are fairly simple in their structure.
    • One can look at their premiums, their cash values and their dividends, if there happen to be any. 
  • Universal life presents something of a paradox. 

--  Ben H. Mitchell, [Bonk: a consulting actuary with Tillinghast in Atlanta - Years-?]

1981 - SOA - Universal Life (RSA81V7N412), Moderator: Samuel H. Turner, Society of Actuaries - 16p 

  • In regard to this matter of dividends, every member of this convention is aware of the immense profits made by companies from lapses; and from that source many of the companies have been able to make dividends.
  • .... I think with Mr. Paine, of Maine, that the time has come, when some measures should be adopted to prevent this wholesale slaughter of policies of life insurance. 

 --  Mr. Clarke

1871-2, NAIC Proc., (fka National Insurance Convention)

  • 1950 - SOA - National Service Life Insurance, Society of Actuaries - 19p
  • <WishList> - 1974 - SOA - Philosophies in the computation and dissemination of dividend illustrations, Society of Actuaries (Committee on Cost Comparison Methods and Related Issues (Special) - 85p
  • 1978 10 - SOA - Dividend Philosophy (rsa78v4n41), Society of Actuaries - 12p
  • 1980 - SOA - Dividend Philosophy (rsa80v6n418), Society of Actuaries - 18p
  • 1980 06 - SOA - Premiums and Dividends -- Participating Insurance (rsa80v6n31), Society of Actuaries - 26p
  • 1982 - SOA - Future Dividend Philosophy, Society of Actuaries - 22p
  • 1983 - SOA - Universal Life and Indeterminate Premium Products and Policyholder Dividends, Society of Actuaries, by Thomas G. Kabele - 96p
  • 1991-1992 - SOA - Final Report* of the Task Force for Research on Life Insurance Sales Illustrations, Society of Actuaries - 142p
  • Dividends paid on life insurance are, in effect, only an adjustment in the premium paid -- a price reduction. (p60)

1977 - DOTT/ Treasury - Blueprints for Basic Tax Reform - 243p

  • Historically, illustrated dividends were understated in sales illustrations and we were spoiled, but in recent years, that doesn't seem to be the case.
    • Our task force feels that there must be more precise definitions and stricter rules governing the definitions of supportability and current experience.
    • We took our concerns to the ASB public hearing on March 3, 1993 in Chicago.
    • We asked the ASB to review the current actuarial practices and help define and strengthen the definitions and rules regarding supportability of sales illustrations.
    • We were expressing our concern not just for the existing downward interest rate market, but for all economic cycles over a long period of time.

--  Robert Nelson (NAIFA / NALU)

1993 - SOA - Sales Illustrations - We Can't Life With Them, But We Can't Live Without Them!, Society of Actuaries - 28p

  • While we work to resolve the dividend issues, there are those who say that we are at best deciding what color to paint a dinosaur.

1982 - Journal - American Academy of Actuaries

  • Hal Phillips (Calif.) asked whether it was appropriate to include the term "dividend" as a nonguaranteed element.
    • He said the dividend was derived from nonguaranteed elements, so he saw this as a semantic problem.

 1994-4, NAIC Proceedings

  • The assertion that dividends reflect "overall profit and loss" and "experience of other clients" is false.

-- Thomas G. Kabele

1983 - SOA - Universal Life and Indeterminate Premium Products and Policholder Dividends, Society of Actuaries - xxp

  • For this reason, mutual insurers need to accumulate a surplus to protect against such adverse contingencies as heavy losses or a decline in investment return.
  • Any money left after paying all costs of operation is returned to the policyholders in the form of dividends. - (p77)

Book - Fundamentals of Risk and Insurance, 1Oth Ed. Vaughn

  • There are many techniques used by companies to calculate policyholder dividends, but many companies use factor formula methods utilizing the statutory reserve as an input item in the calculation of the interest and mortality components.  (p23)

Book - Statutory Valuation of Individual Life and Annuity Contracts | 5th Edition, Claire, Lombardi and Summers

  • After studying various possibilities, it was decided for this initial distribution to make the dividends on the permanent plans of insurance the same as on the Term.

1950 - SOA - National Service Life Insurance, Society of Actuaries - 19p

  • The Academy report, Dividend Recommendations and Interpretations (November 1985), describes this principle as the distribution of the aggregate divisible surplus among policies in the same proportion as the policies are considered to have contributed to divisible surplus.
    • In a broad sense, the Contribution Principle underlies the essential equity implied by participating business.

1987 - AAA - Journal, American Academy of Actuaries

  • Actually, dividends themselves often are called premium refunds or benefits. Sheppard Homans (JIA, XI [I863], 122) referred to his contribution-formula dividends as "overpayments."
  • The American Academy of Actuaries and the Society of Actuaries have defined a dividend as "a refund or return of the premiums paid" (Recommendations of the Committee on Dividend Principles and Practices, 1981, p. 35).
  • Most states consider dividends as rebates for premium tax purposes (McGiil, Life Insurance, pp. 928-29).
  • Also, the IRS considers dividends as premium rebates or a reduction in basis for individual taxation purposes.
  • C. D. Rich (JIA, LXII [1930], 266) defined a dividend as "a benefit produced by the margin of the premium over and above what was required to provide the basic contract" (emphasis added).
  • GAAP accounting also treats dividends as nonguaranteed benefits (Posnak, GAAP, Stock Life Insurance Companies, chap. 10).
  • Of course, for tax purposes, dividends are not considered as "return premiums" or as "benefits."
    • The difference is that dividends are not guaranteed in dollars and cents in the original contract at issue. They are guaranteed prior to their payment (up to one calendar year in advance) but not at issue.
    • The contribution formula is required by state laws and state insurance departments, but the amount is not guaranteed.
    • Likewise, excess interest credits and nonguaranteed premium reductions are not guaranteed.

1983 - SOA - Universal Life and Indeterminate Premium Products and Policyholder Dividends, Society of Actuaries, by Thomas G. Kabele - 96p

  • (p / 2137) - FALLACY No. 3 - THE THIRD FALLACY LIES IN THE LACK OF A "SAFETY FACTOR".
    • Dividends, which are not guaranteed, are usually given in dollars and cents which tend to imply creditability.
    • As the only way to judge the future is to look at the past, a quick glance at some dividend history is shown:
      • From 1932 to 1952, twenty leading mutual life insurance companies missed their twenty year projection by an average of 35 of cost comparison, to be accurate, honest and sound must consider both; computations must be made on an annual basis, or cover sufficient periods of time to be truly illustrative and the three major fallacies must be eliminated,
      • THE NAS SYSTEM - The NAS system was designed to meet these rigid requirements. Chart A indicates the differential in cost should the policy be terminated by death. Chart B indicates the cost differential if surrendered for values. Chart C indicates the cost to the family if excess premiums are used to buy dividends in lieu of life insurance.
      • To avoid any possible charge of discrimination, 25 participating and 25 non- participating contracts were selected. Aggregate averages were used. The participating policies are from leading mutual companies, and the non-participating contracts were selected from leading stock companies. $100,000.00 was used as a base policy in order to take full advantage of all the various quantity discounts, and to effect the maximum degree of equality in the comparison.
      • CHART A - ISSUE AGE : 35 POLICY: ORDINARY LIFE AMT. $100,000.00 (A) ( AVERAGE) -25 MUTUAL POLICIES (B) (AVERAGE) -25 NON- PAR POLICIES, GROSS PREMIUM DIFFERENTIAL $2,376.00 1,876.00 - $500.00 Year
        • From 1940 to 1960, the Metropolitan paid 54.78% of a twenty year projection.
        • Northwestern Mutual paid $5.17 of a projected $23.00 dividend-an error of 345 .
        • In 1947, Company N projected a dividend of $14.72 and paid absolutely nothing;
        • Prudential projected a $52.31 dividend and paid $4.58-a bad guess amounting to $47.73 or a total error of 1,042.
      • The list could be continued endlessly, but these few suffice to make our point.
      • No economist would predicate a 20 year result on non-guaranteed figures without making allowance for a margin of error, and no insurance buyer should base ultimate policy costs on the naive assumption that dividends will be paid as projected.
        • We automatically provide the client with a 20% safety factor. If, in his considered opinion, this margin seems inadequate. a
          larger safety factor, of his own choosing, is used.

 - The Great Misrepresentation regarding the Cost of Life Insurance, by "A Study of Mutual Life Insurance Dividends", National Analytical Service, Inc".

1973 0223 - GOV (Senate) - The Life Insurance Industry - Phillip Hart (D-MI) - Part 3 of 4  ---   [BonkNote-Part 3 of 4]  ---  [PDF-641p-GooglePlay]

Index Code : 1981-12 - 12p
To: NAIC Life Insurance (C3) Subcommittee
<From: American Academy of Actuaries>
Date : June 2, 1981
Length : 12 pages beginning on page 144
Concerning : Dividend principles and practices

Background : This statement was presented at a meeting of the Task Force on Manipulation, Lapsation, Dividend Practices and Annuity Disclosure of NAIC Life Insurance (C3) Subcommittee as a status report of the activities of the Committee on Dividend Principles and Practices.

This statement follows previous submissions on this subject to the NAIC (see statements 1979-14, 1960-18, and 1980-32) .

1920 - Book - The History of Life Insurance in the United States to 1870: With an  Introduction to Its Development Abroad, Charles Kelley Knight, University of Pennsylvania