Participating Account Management Policy - November 2023
This Policy is for all types of Individual participating policies issued by the Company:
- Traditional Participating policies
- Life Insurance with fixed premiums
- Life Insurance with adjustable premiums
- Any new types of Traditional Participating policies introduced by the Company in the future.
- Non-Traditional Participating policies
- Participating Universal Life
Non-Traditional Participating policies do not receive experience dividends.
The Company maintains a Traditional Participating Account for Traditional Participating policies that is separate from other accounts maintained by the Company. The Company also maintains a Participating Universal Life Account which is separate from other accounts maintained by the Company.
The Traditional Participating Account and Participating Universal Life Account accept new business. But there are some dividend classes in the Traditional Participating Account that do not accept new business.
Components of the Participating Account
The Traditional Participating Account has these components:
- Fulfillment cashflows
- Contractual service margin
- Participating surplus.
The Non-Traditional Participating Account has similar components but the experience on this account is not shared with policyholders. As a result, only Traditional Participating Account components are described below.
Traditional Participating Account fulfillment cashflows
Fulfillment cashflows represent all the cashflows required to fulfill the contract, including margins for risk. This portion of the account is used in determining experience dividends. Assets, liabilities, transactions, and earnings are recorded in the account. Investment income earned on the assets, less investment expenses, determines the investment return.
To help us spread income evenly, we review the performance of investments over time. We use the portfolio average approach. This approach shares returns with all Traditional Participating policyholders. With the portfolio average approach, we try to spread out investment income fairly among classes in the Traditional Participating Account. We do not use the investment generation approach, which groups participating contracts into generations that are tracked separately.
Traditional Participating Account contractual service margin and participating surplus
The contractual service margin and participating surplus are not used in determining experience dividends on Traditional Participating policies. They are measures of current and future profit that we track for accounting purposes. They are both forms of surplus.
Some of the money in the Participating Account goes into the contractual service margin and participating surplus as a permanent contribution to surplus. This account is used to:
- Grow and develop the Company
- Provide financial strength and stability to help the Company meet its obligations now and in the future.
We consider this when we determine the dividend scale. For more details, see the Dividend Policy.
Management of investments
The Company follows a set of rules and goals for investing assets in the Participating Accounts. The Board of Directors establishes these rules and goals.
The main goal is simple: To have enough money to meet our contractual obligations to clients. For the Traditional Participating Account, we also want to cover any risks and earn enough money over time to support dividend payments.
We invest the money in the Participating Accounts into diverse types of asset classes. Asset classes are split between fixed income and non-fixed income assets. Fixed income assets are cash and cash equivalents, bonds, private placements, and commercial mortgages. Non-fixed income assets are real estate, and public and private equities. We may use derivatives in certain situations. They can help us replicate assets and serve as a tool for managing risk.
Each type of asset class has its own risk and level of return. We think about which of these asset classes we want to invest in, and how much. By investing in different asset classes, or allocating our assets, we help to diversify, or spread out, our level of risk. These types of decisions add the most value to our investment process.
In addition to managing the investments to earn a return, we also manage investments so the portfolio meets the credit quality and liquidity quality as determined by the rules established by the Board of Directors. A high credit quality helps to minimize defaults and liquidity quality allows us to pay benefits to policyholders when they need it.
Any direct expenses of a Participating Account are paid for using money only from that account.
Indirect expenses are divided among accounts based on studies and estimates from management. How much each account should pay is based on the type of business or on standard allocation methodologies that apply.
Taxes are allocated as follows:
- Premium taxes are paid using money only from that Participating Account
- Taxes on investment income are divided among Participating Accounts based on rules set by the Canada Revenue Agency
- Taxes on income are divided based on the taxable income earned in the Participating Accounts.
About this Policy
This Policy is approved by the Board of Directors and is subject to review at least triennially. The investment expense and tax allocation methodologies were approved by the Board of Directors. From time to time, the Board of Directors may change the Policy and allocation methodologies at their sole discretion. The Board of Directors may review or edit this Policy and allocation methodologies for various reasons, including:
- Corporate changes
- Accounting or actuarial standards changes
- Regulatory or legislative changes
- Material unexpected events