Transparent With-Profits — Freedom with Publicity

Abstract

With-profits business has flourished for over a century as a means of providing access to equity-type investment whilst smoothing the volatility risk. Today's world demands greater transparency, and with-profits has come under increasing criticism in this regard. The Working Party concludes that it remains good value as an investment vehicle and suggests how its transparency can be significantly improved.The paper first analyses the characteristics of with-profits, which it notes has been permitted for stakeholder pensions. It then analyses the various criticisms of with-profits and considers how they can be rebutted without destroying its essential nature, pre-supposing the implementation of the Association of British Insurers' (ABI) Raising Standards scheme.The paper concludes that greater transparency is both necessary for rebuttal and also achievable without destroying the with-profits concept, to this end proposing a model for the internal analysis of identified classes of with-profits business and the inclusion of specified additional information in the statutory returns to the regulators. It also proposes that policyholders be given slightly more information than is specified under Raising Standards. Finally the paper analyses the implications for the life assurance industry, which it considers acceptable.

Retirement Provision in Scary Markets

“…Asher (1991) discusses one such incident, where an 'orphan estate', built up from the contributions of previous generations of policyholders, was expropriated by a new shareholder. Clay et al (2001) discuss UK with-profit policies and make various recommendations as to disclosure and the protection of vulnerable parties. They believe, however, that smoothing necessarily requires discretion on the part of the fund's governing body, in order to ensure equity and solvency.…”

Address by the President of the Institute of Actuaries: Thinking and Behaviour

“…12.10 There is, as ever, a beneficial spin-off to the reviews of the withprofits process; it causes actuaries and regulators to think more deeply about the nature of the beast. One result was the paper, 'Transparent With-Profits ö Freedom with Publicity', by Clay et al (2001), mentioned in {7.3.…”

Guaranteed Annuity Options: Five Issues for Resolution

“…This may not be well defined, instead referring to a distribution of surplus. The lack of clarity in the definition of the with-profits contract has been recognised by the plans in Association of British Insurers 2000, and is discussed by Clay et al (2001). Offices will also Table 5.…”

“…5.6.3 Additional disclosures in the Returns to the FSA may also be helpful: the suggestions in Clay et al (2001) (1998). This describes the so-called modified statutory method of accounting; in other words, some modifications are made to the statutory solvency valuation to produce the accounts.…”

“…6.4.5 It is hoped that this would enable a better appreciation of the accounts, in particular: ö Disclosing asset shares is a helpful step in understanding the`realistic' liabilities of a company, and hence its estate. Clay et al (2001) proposed disclosures in the returns to the FSA of asset shares for certain product groupings. However, in setting out what are asset shares, consideration has to be given to how these are affected by charges for guarantees.…”