The Dividend Scale Interest Rate Explained | iAssure

The dividend scale interest rate (DSIR) is the interest rate an insurer uses as one input when calculating policy dividends on participating whole life insurance. It is NOT the participating account's actual annual return. The DSIR smooths investment performance over time (gains and losses amortized over 15 to 20 years, unrealized bond movements typically not recognized), so changes lag the market. This smoothing is the reason participating whole life dividend scales show much less year-over-year volatility than underlying markets, and it is the primary reason par whole life can sit alongside equities and bonds as a distinct asset class in a well-constructed corporate portfolio.

What the DSIR actually is

A Canadian participating whole life insurer holds a pool of policyholder premiums in a participating account. That account generates investment returns, pays claims, absorbs expenses, and funds policyholder dividends. The DSIR is the interest rate the insurer declares each year to describe the "investment yield" component of its upcoming dividend scale.

Two points of confusion that come up often:

• The DSIR is not the same as the participating account's actual rate of return. The account might earn 8% in a given year while the DSIR is set at 6.4% for that year. The difference is smoothing (explained below).
• The DSIR is not the rate of return on the policy. Whole life insurance doesn't have a direct "interest rate on your policy" the way universal life does. The DSIR is an input into the dividend calculation, and the dividend is one component of the policy's total growth; the other is the guaranteed cash value build. For a return-on-policy measure, look at the illustration's internal rate of return (IRR) on cash value or death benefit at specific ages.

Move-to-market smoothing: why the DSIR lags the market

Participating account investments include bonds, equities, real estate, commercial mortgages, private placements, and policy loans. Some of these move in price daily (public equities, listed bonds); others are held at book value or marked infrequently (private debt, real estate). The insurer uses a move-to-market smoothing approach to translate this raw performance into a stable DSIR:

• Unrealized bond gains and losses are typically not recognized at all while the bond is held.
• Realized bond gains and losses are amortized over the remaining term to maturity.
• Equity gains and losses that differ from long-term expected returns are typically amortized at 15% to 20% per year.

Mechanically, this means the DSIR in any given year blends portions of the participating account's returns from the past 5-20 years. A sharp drop in equities this year moves the DSIR down gradually over several future years; a rally back doesn't get reflected in full this year either. Over a 30-year horizon, the DSIR ends up very close to the participating account's actual long-run average, but with standard deviations typically under 2%, compared to 15%+ for the underlying equity index.

How to read a policy illustration

Every policy illustration shows dividend-dependent values (cash value, death benefit, paid-up additions) under the current dividend scale. Two additional scenarios should always be requested:

• Current DSIR minus 1%. A moderate adverse scenario: what happens if the dividend scale is 1 percentage point lower throughout the life of the policy.
• Current DSIR minus 2%. A more conservative adverse scenario: what happens if the dividend scale is 2 percentage points lower throughout.

For corporate-owned policies with 30-60 year horizons, the stress-tested values matter more than the current-scale values. If the strategy works at DSIR minus 2%, it is reasonably robust to long-term insurer underperformance. If it only works at the current scale, you are making a strong bet on sustained high returns in the participating account.

Comparing DSIRs across insurers

Most major Canadian par whole life insurers have reported DSIRs in the 5.5% to 6.5% range in recent years. The spread between the highest and lowest is usually under 1 percentage point at any given moment. This small range hides meaningful differences in how insurers manage their participating accounts:

• DSIR stability. An insurer that has held its DSIR steady or moved it in small increments over 15-20 years is managing differently from one that has made large adjustments. Stability is particularly important for long-horizon corporate-owned policies where the policyholder needs to rely on the scale across decades.
• Participating account asset mix. Insurers with larger allocations to private assets (commercial mortgages, private placements, directly-owned real estate) generally earn a yield premium that supports the DSIR over time, at the cost of less transparency than pure public-market portfolios.
• Ownership structure. Mutual insurers direct all participating account profits to policyholders and capital; stock insurers may direct approximately 3% to shareholders under the Insurance Companies Act.

The public dividend-scale-history tables from each major insurer are the starting point. When two insurers have similar current DSIRs, historical stability is the deciding factor for a long-horizon policy.

What a DSIR change means for your existing policy

If your insurer reduces its DSIR, your policy's future dividends will likely be smaller than the original illustration projected. The impact depends on when in the policy's life the reduction occurs and which dividend option you elected:

• Paid-up additions (PUA) option. The annual dividend buys additional insurance; a lower DSIR means smaller additions. Over decades the cumulative effect can be substantial, but it does not endanger the policy's guaranteed values.
• Premium offset. If your policy was illustrated to reach premium offset in year 15, a sustained DSIR reduction can push that date out, potentially requiring resumed external premium payments.
• Cash dividend or deposit-on-interest. Lower DSIR means smaller cash distributions, but does not affect the policy's insurance coverage.

In all cases, the policy's guaranteed values (guaranteed cash value and guaranteed death benefit) are unaffected by DSIR changes. It is the non-guaranteed dividend-driven growth that can vary.