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Both long-duration life insurance contracts and short-duration property and casualty insurance contracts may include provisions for policyholder dividends. Policies with dividend features may be sold by both mutual and stock life insurance entities.

5.9.1 Dividend features based on the contribution principle

Policyholder dividend features in certain long-duration participating contracts that meet the definition outlined in ASC 944-20-15-3 (referred to as the contribution principle) are recognized over the life of the contracts.

ASC 944-20-15-3

Consistent guidance in the Long-Duration Subsections in this Subtopic (and other Subtopics within the Financial Services—Insurance Topic) applies only to certain long-duration participating life insurance contracts of mutual life insurance entities and certain stock life insurance entities. For purposes of that guidance:
a) Mutual life insurance entities include assessment entities, fraternal benefit societies, and stock life insurance subsidiaries of mutual life insurance entities.
b) Participating life insurance contracts denote those that have both of the following characteristics:
1) They are long-duration participating contracts that are expected to pay dividends to policyholders based on actual experience of the insurance entity.
2) Annual policyholder dividends are paid in a manner that both:
a) Identifies divisible surplus
b) Distributes that surplus in approximately the same proportion as the contracts are considered to have contributed to divisible surplus (commonly referred to in actuarial literature as the contribution principle).

Annual policyholder dividends on participating contracts are based on actual performance of the insurance enterprise, and the guidance requires that such dividends be reported separately as an expense in the statement of earnings and be based on estimates of amounts incurred for the policies in effect during the period.
ASC 944-40-25-30 and ASC 944-40-35-22 also require that a liability for terminal dividends be accrued in the liability for future policy benefits if payment of the dividend is probable and the amount can be reasonably estimated, which would ordinarily be the case. Because the rights to terminal dividends accumulate to policyholders over a policy's life, the terminal dividends should be recognized as an expense over the life of a book of participating life insurance contracts at a constant rate based on the present value of the base used for the amortization of DAC.
Many mutual entities set up special structures for the dividend participating contracts called “closed blocks” when they demutualize. Guidance on accounting by insurance enterprises for demutualizations and the formation of mutual insurance holding entities and for certain long-duration participating contracts can be found in the demutualizations subsection of ASC 944-805, Insurance - Business Combinations.

5.9.2 Dividend features not using the contribution principle

For those participating contracts not using the contribution principle identified in ASC 944-20-15-3, the determination of the amount of the dividend is based upon the policy provision, applicable law, company policy, and the actions of the board of directors in accordance with guidance in ASC 944-50-30-1 through ASC 944-50-30-3.

Participating Contracts

ASC 944-50-30-1

Policyholder dividends accrued under paragraph 944-50-25-1 shall be measured using an estimate of the amount to be paid

Participating Contracts with Income-Based Dividend Limitations

ASC 944-50-30-2

Income-based dividend provisions for participating contracts other than those long-duration participating life insurance contracts that meet the criteria in paragraph 944-20-15-3, shall be based on net income that includes adjustments between general-purpose and statutory financial statements that will reverse and enter into future calculations of the dividend provision.

Participating Contracts Without Income-Based Dividend Limitations

ASC 944-50-30-3

Policyholder dividends shall be recognized over the premium-paying periods under paragraph 944-50-25-3 based on dividends anticipated or intended in determining gross premiums or as shown in published dividend illustrations at the date insurance contracts are made.

Group contracts may also have dividend provisions based upon the experience of the group or upon the level of investment return that the group's funds have generated. Such payments are not generally considered dividends as that term is defined in ASC 944-50-30-1 through ASC 944-50-30-3, as they are determined on an individual contract basis rather than on a class of contract basis.
Most insurance entities do not pay policyholder dividends. For those entities still paying a dividend, the undeclared dividends should be accrued at the balance sheet date using the best available estimate of the amount of dividends to be paid, as described in ASC 944-50-30-1 through ASC 944-50-30-3.
Policyholder dividends are charged against income. "Dividends" related to the experience of a group contract generally reduce premium income or are recognized as credits to contract holder funds.

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