By Jim Connolly
The downward trend of dividends paid to policyholders in the last few years may be about to reverse as interest rates continue to creep upward.
Total dividends paid to policyholders for the top 50 companies dropped 5% in 2003 over 2002 after a 2% decline in 2001, according to data from the NAIC annual statement database as compiled by National Underwriter Insurance Data Services/Highline Data.
Dividends from ordinary life insurance policies declined 3% in 2003 over 2002, but increased 8% in 2002 over 2001, the data says. Changes in dividends paid from ordinary annuities were even more pronounced, according to the data. In 2003, there was an 11% drop in ordinary individual annuity dividends over 2002. This followed a 2% increase in 2002 over 2001.
The principal driver of these declines has been the decline in interest rates over the last 4-5 years, according to Paul Graham, vice president and chief actuary with the American Council of Life Insurers, Washington. Dividends are a return of excess money earned on contracts, and part of that excess is generated by interest accrued on contracts, he explains.
Another possible factor, Graham continues, is that there are fewer mutual insurance companies and consequently, fewer participating policies in which contract holders participate in the gains an insurer has experienced. Generally, dividends increase with duration, but there will be fewer of these policies being sold over time, he adds.
The 8% uptick in dividends paid to individual life policyholders in 2002 and the 2% increase in dividends paid to individual annuity contracts could be a reflection of a jump in interest rates in 2001, he says. The larger 11% decline in 2003 over 2002 for individual annuities could reflect annuities greater sensitivity to interest rates, Graham notes. The total value of an annuity is generating interest and therefore reflects current interest rates, he says. Additionally, annuities are tied to short-term interest rates that are prone to bigger changes than long-term rates, he adds.