ASOP No. 15—March 2006
3
Section 3. Analysis of Issues and Recommended Practices
3.1 Contribution Principle—The actuary should use the contribution principle in determining
dividends unless, in the actuary’s professional judgment, a different basis is preferable,
reasonable, and appropriate. The actuary may apply the contribution principle annually or
over an extended period of time. Limitations of the dividend determination process
require that practical considerations be reflected in applying the contribution principle,
and the actuary may recognize such considerations in applying the contribution principle.
The actuary may use approximations, simplified processes, or other adjustments
considering relevant conditions and circumstances such as the size of a particular group
of policies, the costs and practical difficulties of making a dividend scale change, and the
effect of the scale change on individual dividends.
3.2 Dividend Framework
—When advising the insurer with respect to the dividend
framework, the actuary should consider the following: (a) treatment of policies within
the line of business that, in the actuary’s professional judgment, is equitable; (b) the
insurer’s marketing, financial, and other objectives; (c) materiality; (d) relevant policy
provisions; and (e) practical limitations.
3.3 Dividend Factors
—The actuary should determine dividend factors that allocate the
divisible surplus within the insurer’s dividend framework. The actuary should develop
dividend factors based on an analysis of policy factors and actual experience of the
participating block for which dividends are being determined. However, when actual
experience is not determinable, available, or credible, the actuary should consider the
experience and trends in experience of similar classes of business either from the same
insurer, from industry sources, or from other non-industry sources, in that order of
preference. Dividend factors may differ from actual experience, as the actuary may adjust
the factors to reflect the insurer’s financial objectives, to reflect practical limitations, and
to result in an estimated aggregate dividend payout equal to divisible surplus.
The actuary should consider materiality and practical limitations in determining the
policy and dividend factors that are to appear in the dividend formula or other method of
using dividend factors. Thus, the analysis underlying dividend determination may involve
the use a variety of policy factors and actual experience measures, but the actuary need
not include all of these factors.
When developing new dividend factors for all policies is not practical, the actuary may
recommend the continuation of a dividend scale, continuation of certain dividend factors,
or the use of approximations or simplified processes or formulas.
3.3.1 Projection of Experience
—If any projection of experience is made in determining
the dividend factor of any dividend factor class, the actuary should project
experience for all classes of that dividend factor for a line of business to the same
point in time. The actuary should limit such projections to a relatively short time
frame (for example, the period for which a dividend scale is likely to remain