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🏦 '''With-profits contract''' is a form of [[Definition:Life insurance|life insurance]] or [[Definition:Pension|pension]] policy under which the [[Definition:Policyholder|policyholder]] participates in the profits generated by the insurer's underlying [[Definition:With-profits fund|with-profits fund]], typically receiving [[Definition:Bonus|bonuses]] that augment the guaranteed benefits over the life of the contract. Originating in the mutual life offices of the United Kingdom in the 18th century, with-profits business became one of the dominant savings vehicles in British and Commonwealth insurance markets and carries structural parallels to [[Definition:Participating policy|participating policies]] ("par" policies) sold widely in the United States, Canada, Japan, and other Asian markets. The defining feature is the pooling and smoothing of investment returns: rather than passing market volatility directly to policyholders — as in a [[Definition:Unit-linked contract|unit-linked contract]] — the insurer manages a diversified fund and distributes a share of the surplus as bonuses, creating a more stable return profile for the customer while retaining discretion over the timing and magnitude of distributions.

🔀 The bonus mechanism is central to how these contracts operate. Insurers typically declare two types: [[Definition:Reversionary bonus|reversionary (or annual) bonuses]], which once added to the policy become guaranteed and cannot be taken away, and [[Definition:Terminal bonus|terminal bonuses]], which are discretionary and paid only on maturity, death, or sometimes surrender. The insurer's board or [[Definition:With-profits committee|with-profits committee]] determines bonus rates based on the fund's investment performance, expense experience, mortality and longevity outcomes, and the need to maintain adequate [[Definition:Reserves|reserves]] and [[Definition:Solvency|solvency]] margins. Because the insurer retains discretion and guarantees only the sum assured plus declared reversionary bonuses, the accounting and actuarial treatment is complex. Under [[Definition:IFRS 17|IFRS 17]], with-profits contracts that involve sharing of returns from underlying items generally fall within the [[Definition:Variable fee approach|variable fee approach]], requiring insurers to treat their share of the fund's returns as a variable fee. [[Definition:Solvency II|Solvency II]] presents its own challenges: the [[Definition:Risk margin|risk margin]], the treatment of [[Definition:Transitional measures|transitional measures]], and the split between assets backing guarantees and those backing discretionary benefits all require careful actuarial judgment. In the UK, the [[Definition:Prudential Regulation Authority|Prudential Regulation Authority (PRA)]] and the [[Definition:Financial Conduct Authority|Financial Conduct Authority (FCA)]] impose specific governance requirements on with-profits funds, including the appointment of a [[Definition:With-profits actuary|with-profits actuary]] and the publication of [[Definition:Principles and practices of financial management|Principles and Practices of Financial Management (PPFM)]].

📉 While with-profits contracts were once the flagship product of the UK and Commonwealth life insurance industries, their prominence has declined significantly since the early 2000s. The [[Definition:Equitable Life|Equitable Life]] crisis in the UK — where an insurer's inability to meet guaranteed annuity rate obligations led to its closure to new business in 2000 — exposed the risks of opaque bonus structures and inadequate reserving for embedded guarantees. This watershed event accelerated a market-wide shift toward [[Definition:Unit-linked contract|unit-linked]] and [[Definition:Defined contribution|defined contribution]] products that transfer investment risk more explicitly. Many large UK insurers have placed their with-profits funds into [[Definition:Run-off|run-off]] or [[Definition:Part VII transfer|Part VII transferred]] them to consolidators. Yet with-profits concepts remain alive globally: Japanese life insurers continue to write substantial participating business, and the principle of profit participation — policyholders sharing in the financial outcomes of the pool — endures as a foundational concept in mutual and cooperative insurance models worldwide. For actuaries and risk managers, the legacy with-profits books still on insurer balance sheets demand ongoing attention to [[Definition:Asset-liability management|asset-liability management]], guarantee valuation, and equitable treatment of remaining policyholders.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Participating policy]]
* [[Definition:Unit-linked contract]]
* [[Definition:Reversionary bonus]]
* [[Definition:Terminal bonus]]
* [[Definition:Variable fee approach]]
* [[Definition:With-profits fund]]
{{Div col end}}

Definition:With-profits contract - Revision history

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