Constraints on discretion: Distributing surplus in with‐profits life insurance

Abstract

When Equitable Life went to court in a case concerning the bonus rates it applied to pension policies with guaranteed annuity options, it emphasised that its rules gave it wide discretion in its bonus decisions, an argument that was unsuccessful. This paper considers the constraints on the discretion available to life insurers in the way they determine bonuses on with‐profits policies. It reviews four previous court cases concerning withprofits policies: in one of these, the insurer lost. The Financial Services Authority has now taken on board the need for life insurers to describe their bonus practices far more fully. That will help lead to a more precisely defined contract between policyholders and insurers. It is also proposing new rules, which should reduce the potential for discretion to be abused. The paper also considers the actuarial profession, whose members have the responsibility of making recommendations to life insurers about bonuses. It suggests there may be benefit if the profession can go beyond the limited guidance on bonuses it has issued, to develop and publish best practice in the bonus declaration process.