4Equity in a Shareholder-Owned Life Insurer

4                      Equity in a Shareholder-Owned Life Insurer

4.1.2 Equity in a shareholder-owned life insurer will generally comprise only shareholder equity.  Although participants in the industry commonly refer to “policyholder retained profits”, in relation to Australian business such amounts are unvested policyholder benefits liabilities.  Under Australian legislation, “policyholder retained profits” relating to Australian life insurance business are paid to policyholders, although the timing of the payment is at the discretion of the life insurer.  A life insurer may have unallocated surplus that is in the nature of “policyholder equity” if it is a friendly society or has foreign life insurance operations in a jurisdiction that permits retained profits to remain unallocated between policyholders and shareholders, and the policyholders’ component has yet to be determined.  A key factor in evaluating the classification as liability or equity of retained profits in a friendly society is the benefit fund rules of each particular benefit fund.  If the rules of a benefit fund were such that all retained profits by default are for the benefit of policyholders, such retained profits would be classed as policyholder benefit liabilities.