This concept primarily related to the topic of life insurance. Both types of insurance policies, term and cash value, can act as either participating or non-participating (par or non-par, respectively). Most policies are par policies.
Insurance companies will charge higher than necessary premiums with the intent of returning the excess. Excess premiums are charged because the insurance company will operate based on more conservative estimates. For example, they will base premiums on higher operating costs and lower rates of return than are actually expected. This allows the insurance company to better protect against non-diversifiable (highly correlated) risk. [Read more…] about Participating vs. Non-Participating Insurance Policies