Profitability of Life Insurance Product Categories

57.620/PC4/VK Brussels, 3 December 1992.
COMMUNICATION D. 104.
Subject: Profitability of the categories of life insurance products.

I. INTRODUCTION.
In the context of ex post control, it is important for the Control Department to clarify its position regarding the application of Article 21bis of the Control Act.
To this end, the basic principles of profitability per product or group of products are explained below.
Where necessary, modifications and clarifications are made to Communication D.100 concerning the statistics of Life insurance (direct insurance transactions in Belgium).
The new statistics regarding 1992, modified in accordance with the Communication, will be sent to the companies at a later date.

II. BASIC PRINCIPLES.

1. Life Statistics.
   The aforementioned document is extremely important and must therefore be filled in by the companies with the utmost care. The Control Department will indeed base its analysis and control of profitability on it. In a first phase, the Control Department will limit itself to direct business in Belgium.

2. Categories of insurance products.
   The categories of insurance products that are taken into account for profitability control correspond to items I to VII, mentioned in point B. PROFITABILITY of Annex 1 of Communication D.100.

3. Non-technical income.
   Companies that would allocate non-technical income to products must fill in the newly added item "Allocation of non-technical income (after deduction of expenses) to the categories of insurance products" in the statistics, and this for the columns concerning the profitability of tables A1 and A2 (see Communication D.100). The use of non-technical income will however not be taken into account in the profitability calculation per product category, unless a deviation is obtained from the Control Department based on properly justified elements.

4. Unrealized capital gains and losses.
   Except for insurance linked to an investment fund, these are not included in the profitability calculation. For information purposes, however, companies that would allocate unrealized capital gains or losses to product categories for insurance not linked to an investment fund are asked to fill in the new items "Unrealized capital gains on investments" and "Unrealized capital losses on investments", and this without distinction according to their origin (technical income or non-technical income).

5. Investment income and costs.
   The Control Department will, in the analysis of profitability per product category, use as the reference basis for the determination of investment income and costs, the method described in Annex B.
   Nevertheless, companies may use their own method when filling in the statistics, provided that this respects the principles set out in the present Communication (and in particular point 3 concerning non-technical income).
   The Control Department will, together with the company concerned, examine any significant difference that might appear between the results obtained according to the "C.D.V." method and those obtained according to the company's own method. Furthermore, account will be taken of the exceptional or recurring nature of the following elements: impairments and depreciation, reversal of impairments and depreciation, capital gains and losses on realization. With regard to transactions linked to an investment fund, the analysis of profitability is based on the amounts mentioned in items 8.1 to 8.4 and 9.1 to 9.5 of table A2.

6. Theoretical rent.
   In order to be able to correctly allocate the income and costs of each category of insurance products, companies may take into account "theoretical rent".

7. Profit sharing (including premium refunds that have the nature of profit sharing).
   Companies may allocate profit sharing for a category of products or for any smaller subset thereof, provided that this does not jeopardize the profitability of the product category concerned or the smaller subset of products. The Control Department may object to the allocation of profit sharing for a smaller subset of a product category, if this jeopardizes the profitability of the product category.

8. Operating costs and income.
   If it appears that the distribution of operating costs and income by the company between the different categories of products gives a distorted picture of the situation, the Control Department may, in consultation with the company, adopt other allocation keys.

9. Financial year.
   The profitability review will be carried out per financial year without being limited to one financial year, as the evolution of results over several years is of great importance.

10. Profitability.
    The profitability review will be carried out at the level of the gross and net technical-financial balances (see Annex A, p. 4).
    Furthermore, care will be taken to ensure that reinsurance plays its "normal" role and does not serve to systematically compensate for the structural deficit of a product.

III. MODIFICATIONS TO COMMUNICATION D.95.

1. Operating costs.
   Companies are required to distribute their operating costs over the 13 columns. They must justify to the Control Department the distribution methods they have used for these categories as well as for the different management and activities. For this purpose, a questionnaire has already been sent. Companies that from now on wish to report separate amounts for the 13 product categories for internal claims settlement costs, acquisition costs, management costs, and costs related to the management of investments, must also justify to us the distribution of operating costs over these 4 items. To help companies that do not yet have a refined analytical accounting and management cost control, the Control Department intends, in cooperation with the sector, to define rules that will allow the distribution of operating costs over the 13 categories of insurance products. Pending the possible establishment of these rules, companies will fill in the statistics in accordance with the provisions of the first paragraph above.

2. Ceded reinsurance.
   Companies will provide an explanation in a questionnaire sent by the Control Department regarding the manner in which they have performed the breakdown over the different categories.

3. Statistics.
   The provisions that follow apply to the 7 categories of products except those concerning branch 27 on behalf of third parties.
   To achieve coherence with non-life statistics, the balance of ceded reinsurance between the gross technical-financial balance and the net technical-financial balance has been moved.
   Furthermore, it was decided to add:
   a) for those product categories, the following items:

• ALLOCATION OF NON-TECHNICAL INCOME (AFTER DEDUCTION OF EXPENSES) TO THE CATEGORIES OF INSURANCE PRODUCTS (item XI).
• GROSS BALANCE BEFORE FINANCIAL INCOME.
• GROSS TECHNICAL-FINANCIAL BALANCE.
  b) for the categories concerning insurance not linked to an investment fund, the following items:
• ALLOCATION OF UNREALIZED CAPITAL GAINS ON INVESTMENTS TO THE CATEGORIES OF INSURANCE PRODUCTS (item XII).
• ALLOCATION OF UNREALIZED CAPITAL LOSSES ON INVESTMENTS TO THE CATEGORIES OF INSURANCE PRODUCTS (item XIII).

4. List of investments concerning unallocated assets.
   Separately from the profitability control of products, the Control Department will request a list of investments concerning unallocated assets and this per category of investment (e.g.: building, share, ...) without breakdown over the different insurance products. To this end, the necessary instructions will be given to the companies at a later date.

5. Further provisions for table E (see Communication D.100).
   The income and costs of investments may not be mentioned in the items deposits and withholdings of table E but are understood to be in the variation (1.2. - 1.1.) of the value of the fund unless the reinvestment of income in this fund is done by a change in its number of units. In the latter case, the deposits are mentioned in item 3.2. (other deposits) and bring about a simultaneous change in the value of the fund (item 1.2.) and the value of the unit (item 2.2.).

IV. COMPLIANCE WITH THE ANNUAL ACCOUNTS.

1. The provisions of the Royal Decree of 12 November 1979 must be observed even if some of them would lead to a discrepancy with the new statistical statement. The Control Department cannot allow deviations from these provisions.
   In a Communication, the Control Department can however provide clarifications for certain points that are not explicitly dealt with in the aforementioned decree.
   This has happened, more specifically for the "tax on profit sharing" (Communication D.89, page 11, point F).
   The instructions regarding this point in the aforementioned Communications are repealed.
   Henceforth, with regard to the annual accounts, the negative balance of the tax on profit sharing is to be placed in the item "I.F. Other technical costs".

2. Companies are invited to send to the Control Department the accurately filled-in annexes C.1 and C.2, to link the annual accounts concerning both direct insurance transactions in Belgium or abroad and reinsurance, and the statistical statements concerning only direct insurance transactions in Belgium.
   If a company conducts life and non-life branches, this document must only be filled in once and added to the non-life statistics.

DESCRIPTION OF THE ACTIVITIES INVOLVED
Annex C.1:

Annex C.1 allows a technical-financial balance "LIFE" and "NON-LIFE" to be brought forward by regrouping on the one hand the transactions included in the statistical statements, namely the direct insurance transactions in Belgium, and on the other hand, the transactions that do not appear there and concern:

• other activities (columns 3 and 7), i.e. insurance transactions abroad, directly or through branches, as well as assumed reinsurance;
• transactions linked to the activity group "Statutory pensions" (column 4), as mentioned in the fifth column of Annex 13 of Chapter I, Section III of the Royal Decree of 12 November 1979;
• transactions linked to accident insurance (column 8), as mentioned in the fourth column of Annex 13;
• income and costs associated with the management of free assets (column 10).
  The columns (2) and (3) together make up the activity group "LIFE", as defined in Article 8, § 2, A. of the Royal Decree of 12 November 1979. In the same way, columns (6) and (7) together make up the activity group "B.O.A.R.", as defined in Article 8, § 2, B. of the same decree.

Annex C.2:
The compliance between the statistical statements and the published annual accounts is made possible by the regrouping of income and costs associated with the activities "LIFE" and "STATUTORY PENSION" (column 5 - Annex C.1) and "NON-LIFE" (column 9 - Annex C.1) and with the management of "free assets" (column 10 - Annex C.1) within a single column and whose sum must correspond to the total of items I to VI of the first column of Annex 13.

Please find attached the following documents:
A. STATISTICS OF LIFE INSURANCE (Direct insurance transactions in Belgium).
This document replaces that included as Annex 2 to Communication D.100.
B. METHOD FOR THE BREAKDOWN OF INCOME AND COSTS OF INVESTMENTS BETWEEN THE 33 INSURANCE CATEGORIES concerning profitability, except those concerning branch 27 on behalf of third parties

• "C.D.V. METHOD".

C.1 and C.2 COMPLIANCE STATISTICS AND ANNUAL ACCOUNTS.

The Chairman,
J.-M. DELPORTE.