Profitability of Life Insurance Product Categories

57.620/PC4/VK Brussels, 3 December 1992.

COMMUNICATION D. 104.

Subject: Profitability of Life Insurance Product Categories.

I. INTRODUCTION.

Within the framework of ex-post control, it is important for the Supervision Department to clarify its position regarding the application of Article 21bis of the Supervision Act.

To this end, the basic principles of profitability per product or group of products are explained below.

Where necessary, amendments and clarifications are made to Communication D.100 concerning the statistics of Life Insurance (direct insurance transactions in Belgium).

The new statistics regarding 1992, amended in accordance with the Communication, will be sent to the companies at a later date.

II. BASIC PRINCIPLES.

1. Life Insurance Statistics.

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

2. Categories of Insurance Products.

The categories of insurance products eligible for profitability control correspond to headings 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 heading "Allocation of non-technical income (after deduction of expenses) to 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 Supervision Department based on properly justified elements.

4. Unrealized 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 gains or losses to product categories for insurance not linked to an investment fund are asked to fill in the new headings "Unrealized gains on investments" and "Unrealized losses on investments", and this without distinction according to their origin (technical income or non-technical income).

5. Investment Returns and Costs.

The Supervision Department will, in the analysis of profitability per product category, use as the reference basis for the determination of investment returns and costs, the method described in Annex B.

Nevertheless, companies may, when filling in the statistics, use their own method, provided that it respects the principles set out in the present Communication (and in particular point 3 concerning non-technical income).

The Supervision 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, gains and losses on realization.

Regarding transactions linked to an investment fund, the profitability analysis is based on the amounts mentioned in headings 8.1 to 8.4 and 9.1 to 9.5 of table A2.

6. Theoretical Rent.

In order to correctly allocate the returns 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 Supervision Department may object to the allocation of profit sharing for a smaller subset of a category of products, if this jeopardizes the profitability of the product category.

8. Operating Costs and Revenues.

If it appears that the distribution of operating costs and revenues by the company among the different categories of products gives a distorted image of the situation, the Supervision 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, page 4).

Furthermore, care will be taken that reinsurance plays its "normal" role and does not serve to systematically compensate for the structural deficit of a product.

III. AMENDMENTS TO COMMUNICATION D.95.

1. Operating Costs.

Companies are required to distribute their operating costs across the 13 columns. They must justify to the Supervision Department the allocation 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 out.

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 expenses related to the management of investments, must also justify to us the distribution of operating costs across these 4 items.

In order to help companies that do not yet have a refined analytical accounting and management cost control, the Supervision Department, in cooperation with the sector, intends to define rules that will allow the distribution of operating costs across 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 out by the Supervision Department regarding how they have carried out the breakdown across 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 headings:

• ALLOCATION OF NON-TECHNICAL INCOME (AFTER DEDUCTION OF EXPENSES) TO CATEGORIES OF INSURANCE PRODUCTS (heading XI).
• GROSS BALANCE BEFORE FINANCIAL RETURNS.
• GROSS TECHNICAL-FINANCIAL BALANCE.

b) for the categories concerning insurance not linked to an investment fund, the following headings:

• ALLOCATION OF UNREALIZED GAINS ON INVESTMENTS TO CATEGORIES OF INSURANCE PRODUCTS (heading XII).
• ALLOCATION OF UNREALIZED LOSSES ON INVESTMENTS TO CATEGORIES OF INSURANCE PRODUCTS (heading XIII).

4. List of Investments Concerning Unallocated Assets.

Apart from the profitability control of products, the Supervision Department will request a list of investments concerning unallocated assets and this per category of investment (e.g.: building, share, ...) without breakdown across 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 returns and expenses of investments may not be mentioned in the headings 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 returns in this fund is done by a change in its number of units. In this 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 in the value of the unit (item 2.2.).

IV. CONFORMITY WITH THE ANNUAL ACCOUNT.

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 Supervision Department cannot allow deviations from these provisions.

In a Communication, the Supervision 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, regarding the annual account, the negative balance of the tax on profit sharing is to be placed in the heading "I.F. Other Technical Costs".

2. Companies are invited to send to the Supervision Department the accurately filled-in annexes C.1 and C.2, to establish the link between the annual account 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 both 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 direct insurance transactions in Belgium, and on the other hand, the transactions that do not appear therein 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 insurance against occupational accidents (column 8), as mentioned in the fourth column of Annex 13;
• returns and costs associated with the management of free assets (column 10).

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 conformity between the statistical statements and the published annual account is made possible by the regrouping of returns 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, the sum of which must correspond to the total of headings 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 RETURNS AND COSTS OF INVESTMENTS AMONG 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 CONFORMITY STATISTICS AND ANNUAL ACCOUNT.

The Chairman, J.-M. DELPORTE.