With-profits Policy - Regulation

Regulation

The policy value is either the basic sum assured plus the bonuses given (for conventional contracts) or the bid value of a unitised with-profits policy. This value is broadly equivalent to the value of the underlying assets. However, because of investment fluctuations this value may exceed the market value of the underlying assets.

Without appropriate regulation an insurance company might not have enough money to pay the value of its policies. This was the case with The Equitable Life Assurance Society in the UK when the costs of annuity guarantees promised to some policyholders meant that the company was forced to suspend the introduction of any new business to the With Profits fund and nearly led to the collapse of the company itself.

The Financial Services Authority (FSA) altered regulation as a consequence of this and other management failures to ensure that an insurance company keeps enough free reserves to protect the company in the event of falls in the markets. The new valuation method requires realistic valuation of the funds assets and growth prospects. In addition each firm must now publish a document called the Principles and Practices of Financial Management (PPFM) for each with-profits fund with a breakdown of the assets and an explanation of the management processes for the fund. These documents although comprehensive are largely indigestible for consumers and are thought to be of use only for Independent Financial Advisers and other industry professionals. The realistic reporting method has been cited as a contributing factor to the demutualization of Standard Life Assurance Company.

In the USA, insurance companies are regulated on a state-by-state basis. However, they must not only comply with the requirements of the state in which they are incorporated, but with the regulations of each state in which they are licensed. The National Association of Insurance Commissioners (NAIC) provides suggested guidelines which each state is free to follow or not. For example, the Insurance Information Institute, "Life insurers are the object of the NAIC’s Intestate Insurance Product Regulation Compact, launched in 2002 as a way to develop uniform standards and a central clearinghouse to provide prompt review and regulatory approval for life insurance products."