DPF policy with minimum interest rates
An insurance contract provides that the insurer must annually credit each policyholder’s ‘account’ with a minimum interest rate (3%). This is the guaranteed amount. The insurer then has discretion with regard to whether and what amount of the remaining undistributed realised investment returns from the assets backing the participating policies are distributed to policyholders in addition to the minimum. The contract states that the insurer’s shareholders are only entitled to share up to 10% in the underlying investment results associated with the participating policies. As that entitlement is up to 10%, the insurer can decide to credit the policyholders with more than the minimum sharing rate of 90%. Once any additional interest above the minimum interest rate of 3% is credited to the policyholder it becomes a guaranteed liability.