What are the participating policies in life insurance business? Can a life insurance company declare a bonus to the policyholders when participating fund is in deficit? Discuss.

Participating policies are the policies issued by an insurance company that participate in the periodical bonus declared by the insurance company. The periodical premium payable for a participating policy will be higher than the premium payable on non-participating policy. Policyholders who take Life insurance policies which are eligible for participating in the surplus arising out of the Participating business are eligible for bonus, if and when declared by the Life Insurance Company. These Policies which are eligible for bonus are also called 'With Profits' Policies or 'Participating' Policies. Policyholders' Bonus is not guaranteed and is subject to availability of surplus arising in the Participating segment of the Life insurance business. An insurer where participating fund is in deficit is generally not allowed to declare bonus. However IRDAI has permitted declaration of bonus if the insurer strictly satisfies the following conditions: It should make good the accumulated deficit in the policyholders' account and transfer adequate assets to cover the cost of bonus, prior to declaration of bonus. Such an transfer from the shareholder's account can be out of profit & loss account balance or reserves in the shareholders account and/or by drawing upon the paid up capital of the insurer. By implication there shall be no deficit in the policyholders' account in case of the insurer opting for declaration of bonus under these circumstances. Any transfer as aforesaid shall be by a debit to the Profit & Loss (Shareholder's) account and a credit to the Revenue (Policyholders') Account. The funds so transferred to the Policyholder's Account shall be irreversible in nature i.e at no point of time can they be recouped to the Shareholders' Fund. The transfer to the Policyholders' Account must be fully backed by transfer of assets/investments to the Policyholders' funds and should be adequate to meet the Policyholders' liabilities including the cost of bonus. The proposed rates of bonus should be capable of being sustained in the future. The transfer of the funds to the Policyholders' account should be supported by a special resolution of the shareholders at the general meeting of the insurer. Further the insurer should appropriately increase the paid-up equity capital within six months from the date of transfer of funds, or such longer period as may be approved by the authority, with a view to aligning the paid-up equity capital, such as to make up the deficiency (including the cost of bonus) in the life fund as aforesaid and is backed up and represented by Policyholder's assets/investments. The above provisions, for the purpose of meeting the requirement of declaration of bonus are available to the insurers only during the first twelve financial years commencing from the year in which the life insurance business operations were started. Thereafter, it is expected that the declaration of the bonus will be supported by surplus within the life fund without recourse to the contribution from the shareholders.