Proration for Segregated Asset Accounts — How is the Company’s Share Computed?

As the life insurance industry has issued more and more variable annuity and variable life insurance contracts based on segregated asset accounts, and those accounts have been invested in securities paying inter-corporate dividends eligible for the 70-and 80-percent dividends-received deduction (DRD), the question of how a company should determine the amount of its DRD associated with segregated asset accounts has increased in significance. Because the insurance company is entitled to the company’s share of the DRD associated with the dividends it receives, how does the company compute the company’s share? Why do life insurance companies enjoy only a share of the DRD benefit? The simple answer to the latter question is, because of the application of the concept of proration. We toss around the term, but what does proration mean?