Participating Benefits (AASB 1038_07-04_COMPmay19_01-20)

Except for transfers from unvested policyholder benefits liabilities, participating benefits vested in policyholders in relation to the reporting period shall be recognised in the statement of comprehensive income as expenses for the reporting period.  Such benefits which remain payable as at the end of the reporting period shall be recognised as a component of life insurance liabilities.  

Participating benefits that have been allocated in relation to the reporting period to participating policyholders generally, but that have not yet vested in specific policyholders, shall be recognised as expenses for the reporting period.  Amounts that have been allocated to participating policyholders generally, but that have not vested in specific policyholders as at the end of the reporting period, shall be recognised as unvested policyholder benefits liabilities.

Some life insurers sell participating business.  Participating policyholders are generally eligible to receive the same types of benefits as other policyholders and, in addition, are entitled to participate in the profits relating to participating business.  For example, a participating policyholder may receive a low contractually determined rate of return on savings together with term life cover and, in addition, receive benefits that depend on the investment performance of the pool of assets associated with participating policies and on the risk experience of participating policyholders.  These additional benefits are often called bonuses and are at the discretion of the life insurer.  In some reporting periods the life insurer may withhold a portion of the “profits” from the pool of participating business and recognise these “profits” as unvested policyholder benefits liabilities.  In other reporting periods the life insurer may “top up” the vested benefits to participating policyholders.  Such vesting of benefits is often done to provide a reasonably level vesting of benefits over time, despite volatility in periodic profits from participating business. 

It is sometimes argued that the discretionary nature of participating benefits means that they should be treated as appropriations of profit in the same way as dividends to shareholders.  Because life insurance liabilities relating to all types of policyholders are recognised as liabilities under the Life Insurance Act (excluding some contracts issued by friendly societies), it is appropriate for the participating benefits vested in relation to the reporting period, other than transfers from unvested policyholder benefits liabilities, to be recognised as expenses of the reporting period.  

Mutual life insurers are effectively owned by their policyholder members.  Nevertheless, the mutual life insurer also has obligations to its policyholders.  These obligations are classified as policy liabilities.  Benefits vested in a mutual life insurer’s policyholders, other than transfers from unvested policyholder benefits liabilities, are also to be recognised as expenses in the reporting period in which they are vested.

For financial reporting purposes, participating benefits vested in policyholders in a reporting period but not yet paid are included in life insurance liabilities and are measured at net present values.  In the case of investment account participating business this may be approximately the same as the amount actually allocated to policyholder accounts.  In the case of traditional participating business, there may be a significant difference between the net present value and the face value of the amount vested in policyholders.  The net present value is relevant for financial reporting purposes because it is the best estimate of the net present value of the amount that the life insurer expects to pay out in the future using information based on experience up to the end of the reporting period.  

Where a life insurer “tops up” the vested benefits from previously recognised unvested policyholder benefits liabilities, a transfer between liabilities is recognised.  If a life insurer tops up the vested benefits for participating policyholders other than from unvested policyholder benefits liabilities, the amount of the “top up” is recognised as an expense of the reporting period in which the additional benefits are vested.