{"id":"F2005L04213","name":"Record of resolutions of the Life Insurance Actuarial Standards Board: actuarial standards - incorporating actuarial standards 1.04, 2.04, 3.04, 6.03 and 7.02 (05/12/2005)","slug":"record-of-resolutions-of-the-life-insurance-actuarial-standards-board-actuarial-standards-incorporat","collection":"legislative_instrument","jurisdiction":"commonwealth","status":"repealed","isInForce":false,"actNumber":null,"makingDate":null,"administeringDepartment":null,"currentVersion":{"id":40378,"registerId":"commonwealth-F2005L04213-current","compilationNumber":null,"startDate":"2026-04-01","status":"Repealed","reasons":null,"registeredAt":null},"sections":[{"sectionNumber":"Application to Friendly Societies","sectionType":"subdivision","heading":"Application to Friendly Societies","content":"#### Application to Friendly Societies\n\nThe Act was amended in 1999 to extend its application to friendly societies that undertake life insurance business. However, previous versions of this standard were only applicable to life companies (registered under the Act) other than friendly societies. A separate standard applied to friendly societies.\n\nFor reporting periods commencing on or before 31 December 2004 friendly societies were exempted from the general purpose financial reporting standards applying to life companies by virtue of ASIC Class Order 99/1225. That class order was rescinded with effect for reporting periods commencing on or after 1 January 2005. It is therefore appropriate that regulatory financial reporting requirements be similarly aligned with effect from the application date of this revised standard and that this Standard applies to Friendly Societies.\n\nWith the rescinding of the ASIC class order, it is appropriate, for the purposes of applying the Valuation Standard, for benefits provided in benefit funds where there is a provision for distribution of unallocated surpluses to policy owners to be valued as if they were participating. Benefits provided under benefit funds where is no provision for distribution of unallocated surpluses to policy owners are to be valued as if they were non-participating.","sortOrder":0},{"sectionNumber":"Application of the Valuation Standard","sectionType":"part","heading":"Application of the Valuation Standard","content":"## Application of the Valuation Standard\n\nThe Valuation Standard is made for the purposes of section 114 of the Life Insurance Act 1995.\n\nIt applies:\n\n1.  in respect of all life insurance business (including life insurance business carried on outside Australia) of a registered life company (including a life company which is a friendly society); and\n2.  in respect of the life insurance business of an eligible foreign life insurance company, other than life insurance business carried on outside Australia; and\n3.  to a valuation of the policy liabilities of the company made for the purposes of the Act; and\n4.  for all valuations made in respect of periods ending on or after 31 December 2005 in the case of life insurance companies (other than friendly societies) and on or after 31 May 2006 in the case of friendly societies.\n\nExcept for paragraph 1.5, it will continue to apply until replaced. Unless the Valuation Standard is replaced at an earlier date, paragraph 1.5 will cease to apply to valuations made in respect of reporting periods ending on or after 31 December 2009.\n\nThe Standard is written in the context of Australian legislation and bases of taxation. Appropriate adjustment should be made, for example to allow for different bases of taxation, where this Standard is being applied to overseas business.","sortOrder":1},{"sectionNumber":"PART A","sectionType":"part","heading":"— CONTRACT CLASSIFICATION AND POLICY LIABILITIES IN RESPECT OF LIFE INVESTMENT CONTRACTS","content":"#   \nPART A – CONTRACT CLASSIFICATION AND POLICY LIABILITIES IN RESPECT OF LIFE INVESTMENT CONTRACTS\n\nFor the purposes of this Standard and reporting under the Act, policy liabilities in respect of life investment contracts are to be determined in accordance with the relevant accounting standards, subject to any available options being restricted to the fair value based options.","sortOrder":2},{"sectionNumber":"1","sectionType":"part","heading":"Contract Classification and Application","content":"## SECTION 1 Contract Classification and Application\n\nAPRA’s Prudential Rule 49 clarifies the basis on which policies written by life insurers are to be classified for the purpose of regulatory financial reporting. In particular it distinguishes between those policies issued by life companies that meet the definition of a Life Insurance Contract for regulatory reporting purposes and those that do not (referred to as “Life Investment Contracts”).\n\nPrudential Rule 49 also identifies key components of policies written by life companies and stipulates the circumstances in which such components must be unbundled for regulatory reporting purposes.\n\n1.1 For the purposes of this standard, an unbundled component of a policy is to be treated as if it were a stand-alone policy. After allowing for unbundling, Life Insurance Contracts (including contracts with Discretionary Participation Features) and any associated Life Investment Contracts must be dealt with in separate Related Product Groups.\n\n1.2 After allowing for any unbundling, the Policy Liability in respect of a Life Insurance Contract (including a contract with Discretionary Participation Features) must be determined in accordance with the requirements of Parts B and C of this standard.\n\n1.3 After allowing for any unbundling, the Policy Liability in respect of a Life Investment Contract must be determined in accordance with Section 2 of Part A of this standard.\n\n1.4 Section 2 of Part A of this standard is not to be used for the purposes of calculating the Solvency Liability under the Solvency Standard or the Capital Adequacy Liability under the Capital Adequacy Standard. For those purposes, the prospective valuation methodology outlined in Parts B and C of this standard will apply to all elements of the life insurance business issued by the company, regardless of how it is classified, albeit using assumptions as specified in the Solvency Standard or the Capital Adequacy Standard.\n\n1.5 Where the Actuary determines, and can demonstrate to the satisfaction of APRA, that the calculation of the Policy Liability in accordance with paragraph 2.1 would reduce the retained profits of the statutory fund to such an extent that it would unreasonably hinder the distribution of surplus assets from that fund, then, for policies that were in force at 31 December 2005, the Policy Liability may, with APRA’s agreement, be determined in accordance with the requirements of Parts B and C of this standard.\n\n1.6 Part D of this standard applies to all of the life insurance business issued by the company for the purposes of the Act.","sortOrder":3},{"sectionNumber":"2","sectionType":"part","heading":"Policy Liabilities in Respect of Life Investment Contracts","content":"## SECTION 2 Policy Liabilities in Respect of Life Investment Contracts\n\nLife Investment Contracts consist of at least one Financial Instrument, being the element that gives rise to a financial asset or financial liability. They may also contain additional elements in respect of management services, embedded derivatives or participation features.\n\nThe net contractual obligations under a Life Investment Contract which arise under the Financial Instrument Element of the contract (and any associated management services that are not unbundled) is referred to as the Life Investment Contract Liability, consistent with the terminology adopted under AASB 1038.\n\nLife Investment Contracts with Discretionary Participation Features that are regulated under the Life Insurance Act 1995, are treated in their entirety as if they were Life Insurance Contracts and so are not subject to this section of the standard. They may, however, still be subject to certain minimums or disclosures the quantification of which is subject to this section of the standard.\n\nEmbedded derivatives within a Life Investment Contract are financial instruments and must be allowed for within the Financial Instrument Element for the purpose of this Valuation Standard.\n\nPolicy Liability of a Life Investment Contract\n\n2.1 The Policy Liability in respect of a Life Investment Contract is determined as\n\nPolicy Liability = LICL + MSE\n\nwhere\n\nLICL = the Life Investment Contract Liability, being the liability arising in respect of the Financial Instrument Element\n\nMSE = the net liability (asset) in respect of the Management Services Element.\n\nLife Investment Contract Liability\n\n2.2 The Life Investment Contract Liability, being the component of the Policy Liability that arises under a Life Investment Contract issued by an Australian life insurance company that relates to the Financial Instrument Element (and any associated management services that are not unbundled), is to be determined in accordance with the fair value through profit and loss provisions of the relevant accounting standards (whether or not the Financial Instrument Element is measured on that basis in the general purpose financial statements).\n\nManagement Services Element\n\n2.3 The Policy Liability that arises under a Life Investment Contract is to include the net amount of all liabilities and assets arising in respect of the Management Services Element of the contract. These liabilities or assets include, but need not be limited to, the value of Deferred Fee Revenue and Deferred Acquisition Costs. The measurement of these liabilities and assets is to be in accordance with the relevant accounting standards.\n\nReinsurance of Life Investment Contracts\n\n2.4 The Policy Liability is determined gross of reinsurance (as defined for the purposes of the Act). The recognition and measurement of outwards reinsurance that does not involve the transfer of Insurance Risk are to be undertaken separately in accordance with the fair value through profit and loss provisions of the relevant accounting standards (whether or not they are reported on that basis in general purpose financial statements).","sortOrder":4},{"sectionNumber":"PART B","sectionType":"part","heading":"— PRINCIPLES FOR DETERMINING POLICY LIABILITIES IN RESPECT OF LIFE INSURANCE CONTRACTS","content":"# PART B – PRINCIPLES FOR DETERMINING POLICY LIABILITIES IN RESPECT OF LIFE INSURANCE CONTRACTS","sortOrder":5},{"sectionNumber":"3","sectionType":"part","heading":"The Principles of the Valuation","content":"## SECTION 3 The Principles of the Valuation\n\nOverview\n\nThe purpose of this part of the standard in prescribing a set of principles for the valuation of the policy liabilities in respect of life insurance contracts is to achieve the two essential objectives of:\n\n determining, as at the reporting date, a realistic determination of the policy liabilities of the company in respect of Life Insurance Contracts; and\n\n providing for the emergence of profit in respect of Life Insurance Contracts as it is earned.\n\nThe Best Estimate Liability\n\nThe first of these objectives may be met by determining a best estimate value of the liabilities being the value of the expected future contractual payments to policy owners on the basis of best estimates of future income and outgo.\n\nThe Profits\n\nThe second of these objectives may be met by determining a best estimate value of the expected future profits to emerge under the policies. The explicit provision for future profits, through Bonuses and/or Profit Margins, is a mechanism to facilitate the release of profit as it is earned through the provision of services and the receipt of the related income.\n\nThe sum of the Best Estimate Liability and the value of the expected future profits is called the Policy Liability.\n\nIt is not the purpose of this Standard to prescribe a single methodology for the valuation of policy liabilities in respect of Life Insurance Contracts. The principles of the Standard will normally be achieved by adopting a projection methodology. However, it is recognised that alternative approaches - such as an accumulation methodology - may in some cases be appropriate in achieving the principles.\n\n  \n\n3.1 It is the principles which are paramount in determining the Policy Liability; methodology is incidental to the principles. Projection or accumulation methodologies may be appropriate provided the Actuary can demonstrate that the principles have been met.\n\n3.2 The Policy Liability must provide for both:\n\n1.  a best estimate value of the liability of the company in respect of obligations under Life Insurance Contracts; and\n2.  a uniform emergence of profit in respect of Life Insurance Contracts relative to one or more appropriate Profit Carriers.\n\n3.3 While Profit Carriers are an explicit component of the valuation where a projection approach is used, the Profit Carriers are implicit where an accumulation approach is appropriately used.\n\n3.4 The profit emerging in the reporting period must recognise both:\n\n1.  the expected profits for the period; and\n2.  the Experience Profit for the period.\n\n3.5 The valuation method must provide for the emergence of profit when it is earned. The emergence of earned profit must not be deferred; nor must unearned profit be prematurely recognised.\n\n3.6 Profits are earned on the later of:\n\n1.  the provision of a service to the policy owner; and\n2.  the receipt (or recognition) of income relating to that service.\n\n3.7 When the valuation results in expected future profits for a Related Product Group that are below the Adequacy Threshold for that product group, the value of the shortfall must be recognised immediately as a loss.\n\n3.8 Subject to circumstances covered by paragraph 3.7, profit for the period must not otherwise be affected by a change in the Best Estimate Assumptions in respect of future periods, except that:\n\n1.  where previously recognised losses exist for a Related Product Group and that change in Best Estimate Assumptions results in expected future profits emerging, the present value of those profits must be released to the extent necessary to offset those previously recognised losses; or\n\n1.  where that change is in the Best Estimate Assumption for the discount rate (and future investment earnings and related economic assumptions, where relevant) due to market changes only, and the benefit has no discretionary entitlement to share in investment experience, the present value of the expected future profits which are generated by the change must be released.\n\nWhere the change in Best Estimate Assumptions would result in a release of expected future profits otherwise than as above, the present value of those profits must not be released, but respread to emerge as a uniform proportion of the appropriate Profit Carrier(s).\n\n3.9 In determining the Best Estimate Liability and Best Estimate Assumptions, the Actuary must have regard to the impact on the liability of the distribution of potential future outcomes. Where the benefits being valued contain options that may potentially be exercised against the company, or the potential liability outcomes have an adverse asymmetrical distribution, then the Best Estimate Liability must include an appropriate value in respect of those options and/or asymmetries.\n\n3.10 Approximate methods may be used in determining the Policy Liability of the company where the result so produced is not material or not materially different from that which would result from a full valuation process. In particular, the special circumstances of Reinsurers are recognised as warranting approximate methods.","sortOrder":6},{"sectionNumber":"4","sectionType":"part","heading":"The Valuation of Policy Liabilities","content":"## SECTION 4 The Valuation of Policy Liabilities\n\nOverview\n\nBenefits for life companies other than friendly societies are either Participating Benefits or Non-Participating Benefits. Due to the different nature of these benefits, different approaches are required to the valuation of policy liabilities.\n\nParticipating Benefits\n\nWhere Participating Benefits are provided the policy owner is entitled to share in the profits of the business.\n\nThe participation process is managed by the life company, through the declaration of Bonuses. Company practice, and ultimately the requirements of the Act, control the relationship between policy owner and shareholder entitlements to profits.\n\nThe profit for Participating Benefits includes provision for:\n\n Bonuses (policy owner profits); and\n\n Shareholder Profits.\n\n  \nPolicy Liability \\=\n\nBest Estimate Liability\n\nplus Value of future Best Estimate Bonuses\n\nplus Value of future Best Estimate\n\nShareholder Profits\n\nNon-Participating Benefits\n\nWhere Non-Participating Benefits are provided, profit is entirely the entitlement of the shareholder.\n\nPolicy Liability =\n\nBest Estimate Liability\n\nplus Value of future Best Estimate Shareholder Profits\n\nThe contractual arrangements in respect of the Non-Participating Benefits may entitle the policy owner to additions to the benefit, at the discretion of the company, reflecting the investment experience of the assets backing the benefit. While this is not a distribution of profit, the determination of the additions may involve similar management processes to the distribution of bonus for Participating Benefits. Accordingly, similar valuation methods may be appropriate.\n\nFriendly Society Benefits\n\nFriendly society benefits are neither participating nor non-participating.\n\nFor the purpose of applying the Valuation Standard, benefits provided under benefit funds where there is a provision for distribution of unallocated surpluses to policy owners are to be valued as if they were participating. Benefits provided under benefit funds where is no provision for distribution of unallocated surpluses to policy owners are to be valued as if they were non-participating.\n\n4.1 Participating Benefits\n\n4.1.1 In respect of Participating Benefits, profit must include the policy owners’ share of profits. The valuation of the policy liabilities must, therefore, make allowance for the best estimate at the reporting date of:\n\n1.  the value of expected future Policy Owner Profit Share; and\n2.  the value of expected future Shareholder Profit Share.\n\n4.1.2 Declarations of Bonus are an appropriation of profit for participating business. Accordingly, current year Best Estimate Bonuses are excluded from the Policy Liability, allowing the emergence of this amount as Operating Profit in the period.\n\n4.1.3 The relationship between the assumed allocation of profit to policy owners and shareholders respectively must, in respect of each future year, be consistent with:\n\n1.  the policy conditions; and\n2.  the company’s practice or stated philosophy.\n\n4.2 Non-Participating Benefits\n\n4.2.1 In respect of Non-Participating Benefits, the valuation of policy liabilities must make allowance for the best estimate at the reporting date of the value of expected future Shareholder Profit Share.\n\n4.2.2 Where a Non-Participating Benefit includes an entitlement, at the discretion of the company, to share in the investment experience of the assets backing the benefits, the valuation of the policy liabilities must make allowance for the best estimate at the reporting date of the present value of current year and expected future Discretionary Additions.\n\nConsistency with Asset Values\n\n4.3 Where the basis of asset valuation used for the regulatory financial statements is not consistent with the basis of asset valuation implicit in the valuation of the liabilities, the Actuary must make appropriate adjustments to the Policy Liability.\n\nReinsurance of Life Insurance Contracts\n\n4.4 The Policy Liability is determined gross of reinsurance (as defined for the purposes of the Act), although the gross Policy Liability may be calculated by first determining the necessary components on a net of reinsurance basis and then adjusting the result by the amounts of the corresponding components of the Reinsured Policy Liability.","sortOrder":7},{"sectionNumber":"5","sectionType":"part","heading":"The Best Estimate Liability","content":"## SECTION 5 The Best Estimate Liability\n\nOverview\n\nThe Best Estimate Liability is determined as the value of the expected future payments and receipts under the policy, gross of reinsurance, based on obligations at the reporting date.\n\nBest Estimate Liability =\n\nValue of expected future benefit payments\n\nplus Value of expected future expenses\n\nless Value of expected future receipts\n\nNote that the benefit obligations projected include all contractual benefits. In particular, in the case of Participating Benefits they include Bonuses declared prior to (but not on, or after) the date of valuation.\n\nIn projecting the expected future cash flows, the Actuary makes assumptions about the expected future experience, taking into account all factors which are considered to be material to the calculation, including:\n\n investment earnings\n\n inflation\n\n taxation\n\n expenses\n\n mortality and morbidity\n\n policy discontinuance.\n\nThe Actuary’s assumptions must reflect a best estimate of the likely experience.\n\n5.1 In accordance with the principles of section 3, where the valuation of the policy liabilities involves assumptions as to future experience, the assumptions used must be Best Estimate Assumptions.\n\n5.2 In establishing Best Estimate Assumptions, due regard must be had for the materiality of:\n\n1.  the benefits being considered; and\n2.  the effect of particular assumptions on the determined result.\n\n  \n\n5.3 Valuing Liability Options\n\n5.3.1 The Best Estimate Liability and Best Estimate Assumptions are to have regard to any options or asymmetrical distribution of liability outcomes.\n\n5.3.2 Where the distribution of potential liability outcomes is equally likely to result in a gain or loss, then it will normally be sufficient to adopt the mean of the assessed distributions of future experience for the Best Estimate Assumptions and calculate the Best Estimate Liability accordingly.\n\n5.3.3 However, the Actuary needs to consider and assess the extent that variations in the assumptions may be correlated, and/or may compound one another, in adverse circumstances. In such cases the Best Estimate Assumptions must be adjusted so that the Best Estimate Liability is representative of the mean of the distribution of the potential liability outcomes.\n\n5.3.4 Where the benefits contain options that may be exercised against the company, then either the value of those options must be determined (via a suitable option pricing method) and added to the Best Estimate Liability, or the Best Estimate Assumptions adjusted so as to appropriately capture the value of the options as part of the Best Estimate Liability.\n\n5.3.5 The requirements throughout this standard in respect of Best Estimate Assumptions and Best Estimate Liabilities are to be interpreted in this context.\n\nInvestment Earnings\n\n5.4 Where the cash flows to be valued depend on future investment earnings, the Best Estimate Assumption for investment earnings must reflect the expected investment earnings applicable to the actual assets on which the cash flows depend.\n\n5.5 The Discount Rate\n\n5.5.1 The gross rate used to discount expected future cash flows must, to the extent the benefits under the policy are contractually linked to the performance of the assets held, reflect the expected investment earnings applicable to the assets backing the benefit being valued. Otherwise, a Risk Free Discount Rate is to be used.\n\n5.5.2 This does not preclude the use of discount rates that make allowance for assumptions that are expressed as a percentage of the value of assets, rather than allowing for those assumptions explicitly in the projection. This practice may apply in respect of certain expenses, taxes or profit margins.\n\n5.6 Taxation\n\n5.6.1 For business where tax is based only on profits, liabilities may be determined gross of tax. Otherwise, appropriate allowance must be made for the effect of taxation.\n\n5.6.2 Where allowance for tax on investment earnings is required, it must be made in accordance with Best Estimate Assumptions, but based on an asset profile which would be expected to yield a return equal to the discount rate assumption in paragraph 5.5.1.\n\n5.7 Servicing Expenses\n\n5.7.1 The Best Estimate Assumption for Maintenance Expenses must be sufficient to cover the expected maintenance cost of servicing each policy, in respect of in force business, in the year following the reporting date. The expected maintenance cost of servicing each policy is the expected Maintenance Expenses appropriately adjusted for one-off expenses.\n\n5.7.2 The Best Estimate Assumption for Investment Management Expenses must be sufficient to cover the cost of managing an asset profile which would be expected to yield a return equal to the discount rate assumption in paragraph 5.5.1.\n\n5.7.3 Where Servicing Expense assumptions are expressed in monetary amounts, the assumptions beyond the coming year must be adjusted in line with best estimate inflation assumptions.\n\nAcquisition Expenses\n\n5.8 The Best Estimate Assumption for Acquisition Expenses at Commencement must be the greater of:\n\n1.  Establishment Fees received at Commencement; and\n2.  actual Acquisition Expenses incurred, less expenses which the Actuary considers to be ‘one-off’ in nature.\n\nBoth must be consistently adjusted for tax in accordance with paragraph 5.6.\n\n  \n\nOther Assumptions\n\n5.9 The Best Estimate Assumption in respect of all other assumptions used in the valuation of policy liabilities, must be assumptions about future experience which:\n\n1.  are made using professional judgement, training and experience; and\n2.  are made having regard to reasonably available statistics and other information; and\n3.  are neither deliberately overstated nor deliberately understated.","sortOrder":8},{"sectionNumber":"6","sectionType":"part","heading":"Profit Carriers and Profit Margins","content":"## SECTION 6 Profit Carriers and Profit Margins\n\nOverview\n\nPolicies are written with the expectation of producing profits. Profit Carriers are selected and Profit Margins determined when a policy commences to enable the appropriate emergence of the expected shareholder profit over the term of the benefits. (Policy owner profit emerges through Bonuses.) This is achieved as follows:\n\nProfit Margin =\n\nValue of future Best Estimate Shareholder Profits\n\ndivided by Value of Profit Carrier(s)\n\nwhere the Profit Carrier is a financially measurable indicator of either:\n\n the expected cost of the services provided to the policy owner; or\n\n the expected income item relating to the services.\n\nThe range of services which may be provided to the policy owner, includes:\n\n insurance of mortality, morbidity (or similar risks)\n\n generation of investment income\n\n setting up the policy (selling or acquisition)\n\n ongoing administration\n\n investment management\n\n provision of bonuses\n\nSelection of the profit carrier is critical in determining the magnitude and timing with which profits are released.\n\n  \n\n6.1 Profit Margins\n\n6.1.1 In accordance with the principles of section 3, the appropriate release of expected future shareholder profits is provided for in valuing the policy liabilities, either explicitly or implicitly, through the incorporation of Profit Margins.\n\n6.1.2 A Profit Margin must be expressed, explicitly or implicitly, as a uniform proportion of one or more appropriate Profit Carrier(s).\n\n6.2 Profit Carriers\n\n6.2.1 The appropriate Profit Carrier(s) must be related to the services provided to policy owners by the company. The Actuary, in selecting the appropriate Profit Carrier(s), must consider:\n\n1.  the services and income items applicable to the benefit; and\n2.  the relative risks of services, or of costs, to the company; and\n3.  the relative timing of the provision of the services and the receipt or recognition of income for those services.\n\n6.2.2 Provision of capital to meet Solvency and Capital Adequacy Requirements is not a service for this purpose.\n\n6.2.3 Acquisition is a service for this purpose only when explicit Establishment Fees are received.\n\n6.2.4 The practical implications of selecting multiple profit carriers should be considered relative to the materiality of the results. Where multiple Profit Carriers are used, for ease of computation it may be desirable to retain a constant Profit Margin for all but one of the Profit Carriers selected, allowing the Profit Margin in respect of that remaining Profit Carrier to be the only variable.\n\n6.2.5 Profit Carrier(s), once chosen, must be used consistently for a Related Product Group unless in the Actuary's judgement the Profit Carrier(s) are no longer appropriate.\n\n6.2.6 Where Profit Carrier(s) are changed this must not result in a release of profit at the date of change. This is achieved by equating the values of Best Estimate Shareholder Profits before and after the change in determining the new Profit Margins.","sortOrder":9},{"sectionNumber":"7","sectionType":"part","heading":"Acquisition Expenses","content":"## SECTION 7 Acquisition Expenses\n\nOverview\n\nA company normally incurs Acquisition Expenses and possibly receives Establishment Fees when it acquires new business.\n\nWhere new business is written with the expectation of producing profits, then, if the Establishment Fees are less than the actual Acquisition Expenses, there will be an expectation of receiving future income, part of which goes to meeting the unrecouped Acquisition Expenses.\n\nThe principles for the allocation of expenses to Acquisition Expenses are set out in section 13. Acquisition Expenses are defined in terms of the activities related to the acquiring of new business. The acquisition of new business can generally be considered to include activities of the company such as product marketing, sales, underwriting and administration, undertaken prior to and at the point of issuing the policy and establishing it in the policy records of the company.\n\nThe new business expected to derive from a particular expense may not necessarily be acquired in the same period in which the expense occurs. The new business must, however, be expected to arise as a result of that expenditure. To the extent the expenditure has only a tenuous link with the acquisition of new business - for example, general growth and development expenses – it is not considered to be an acquisition expense.\n\n  \n\n7.1 To the extent that Acquisition Expenses are not recovered by the Establishment Fees, they must be charged against expected future profits, provided that these profits are sufficient to recover them. Any Acquisition Expenses which cannot be recovered from Establishment Fees or expected future profit will emerge as a loss at issue.\n\n7.2 Appropriate allowance must be made in this process for tax on both Establishment Fees and Acquisition Expenses.\n\n7.3 Where expected future profits for a Related Product Group are insufficient to recover unrecouped Acquisition Expenses, the loss must be recognised in accordance with the processes of section 11.\n\n7.4 Where a projection approach is used to calculate the Policy Liability, the expected income which is used to recover Acquisition Expenses is incorporated as a reduction in the Best Estimate Liability calculation. Accordingly, Acquisition Expense Recovery Components are an implicit component of the valuation.\n\n7.5 Where an accumulation approach is used to calculate the Policy Liability the value of the unrecouped portion of Acquisition Expenses which is to be recovered from future income must be explicitly allowed for as a reduction in the liability by using Acquisition Expense Recovery Component(s).","sortOrder":10},{"sectionNumber":"PART C","sectionType":"part","heading":"METHODOLOGIES FOR DETERMINING POLICY LIABILITIES IN RESPECT OF LIFE INSURANCE CONTRACTS","content":"#   \nPART C – METHODOLOGIES FOR DETERMINING POLICY LIABILITIES IN RESPECT OF LIFE INSURANCE CONTRACTS\n\nOverview\n\nIf the Best Estimate Assumptions made at Commencement remain valid through the policy term, and if experience under the benefit exactly reflects those expectations, the methodologies should ensure that profit emerges at each reporting date as:\n\n investment earnings (net of tax) on any retained profits and shareholder capital; plus\n\n release of the expected profits (net of tax) in respect of the valuation period.\n\nIn reality, actual experience in the valuation period will likely differ from that expected, and to this extent there will emerge an experience profit (or loss).\n\nFurther, as experience changes, the Best Estimate Assumptions as to the future may change.\n\nThe principles of this standard require that the present value of profit resulting from a change in non-economic Best Estimate Assumptions of the Actuary, must not be released immediately at the reporting date, but rather must be released appropriately over the future life of the benefit.\n\nAppropriate profit emergence is achieved through a methodology which involves recalculation at each reporting date of the expected future profit. Profit Margins and Acquisition Expense Recovery Components are determined as required to ensure the appropriate release of those future profits.\n\nIn the case of benefits with an entitlement to share in the investment experience of the assets backing them, the methodology must deal specifically with investment experience profits to allow its release over the future life of the benefit as:\n\n in the case of Participating Benefits (including friendly society benefits under benefit funds where there is a provision for distribution of unallocated surpluses to policy owners), future Bonuses and Shareholder Profits; or\n\n in the case of Non-Participating Benefits, future Discretionary Additions.\n\nNote that in this Part, discussions of the detail of the methodologies for calculating policy liabilities will typically be in terms of a benefit. A policy may incorporate multiple benefits. Further, certain processes described in this Part may be performed at a Related Product Group level, which incorporates multiple (like) policies.\n\nWhile recalculation processes described in this Part will normally be considered for a Related Product Group, the Actuary may group benefits at a lower level where this is supported by company practice or stated philosophy and is done consistently over time.","sortOrder":11},{"sectionNumber":"8","sectionType":"part","heading":"New Business - Calculation of Profit Margins and Acquisition Expense Recovery Components","content":"## SECTION 8 New Business - Calculation of Profit Margins and Acquisition Expense Recovery Components\n\n8.1 Profit Margins\n\n8.1.1 Where explicit Profit Margins are required, they are determined by dividing:\n\n1.  the value at Commencement of the expected future profits from the benefit; by\n2.  the value at that date of the appropriate Profit Carrier(s).\n\n8.1.2 The value at Commencement of expected future profits must be determined on the basis of Best Estimate Assumptions.\n\n8.1.3 The Best Estimate Assumptions, with the exception of the Acquisition Expense assumption, must be determined as at a single date, but that date may be:\n\n1.  the beginning of the reporting period; or\n2.  the date of commencement of the business; or\n3.  the end of the reporting period.\n\n8.1.4 The Acquisition Expense assumption will be determined at the end of the reporting period.\n\n8.2 Treatment of Losses\n\n8.2.1 If the projection reveals a value of expected future profit at Commencement for new business in a Related Product Group that is below the Adequacy Threshold, then that loss must either be recognised, or dealt with in accordance with the provisions of paragraph 8.2.2. Any losses at Commencement so recognised must be accumulated. If the Related Product Group subsequently generates profits above the Adequacy Threshold, the cumulative losses must be offset (see section 11).\n\n8.2.2 Alternatively, new business may be grouped with existing in force business for the same Related Product Group for the purpose of calculating Profit Margins. Where new business is so grouped, any losses at Commencement for that new business cannot be accumulated or subsequently offset.\n\n8.2.3 The approach used by the Actuary for treatment of losses on new business must be applied consistently over time.\n\n8.3 Acquisition Expense Recovery Components\n\n8.3.1 Where explicit Acquisition Expense Recovery Components are required, they are determined at Commencement by dividing:\n\n1.  the Best Estimate Assumption for Acquisition Expenses at Commencement (to the extent not recovered by Establishment Fees); by\n2.  the present value at that date of the appropriate Acquisition Expense Recovery Carrier(s).\n\n8.3.2 The Acquisition Expense Recovery Carrier(s) must reflect the element of the premium or other income item, including surrender penalties, designed or intended to recover Acquisition Expenses.\n\n8.3.3 Appropriate adjustment to Acquisition Expenses and Acquisition Expense Recovery Components will be needed where Acquisition Expenses are expected to be incurred in a year other than the year of issue. Any adjustment by the Actuary must have regard to Acquisition Expenses accrued or deferred in the accounts.","sortOrder":12},{"sectionNumber":"9","sectionType":"part","heading":"Reporting Date Recalculations - Benefits Providing","content":"DECEMBER 2005\n\nActuarial Standard 1.04\n\nVALUATION OF POLICY LIABILITIES\n\n![](image.003.png)Life Insurance\n\nActuarial Standards Board\n\n  \nTABLE OF CONTENTS\n\nPage\n\n[INTRODUCTION](#_Toc121212531)\n\n[The Standard](#_Toc121212532)\n\n[Application of the Valuation Standard](#_Toc121212533)\n\n[PART A – CONTRACT CLASSIFICATION AND POLICY LIABILITIES IN RESPECT OF LIFE INVESTMENT CONTRACTS](#_Toc121212535)\n\n[SECTION 1 Contract Classification and Application](#_Toc121212536)\n\n[SECTION 2 Policy Liabilities in Respect of Life Investment Contracts](#_Toc121212537)\n\n[PART B – PRINCIPLES FOR DETERMINING POLICY LIABILITIES IN RESPECT OF LIFE INSURANCE CONTRACTS](#_Toc121212538)\n\n[SECTION 3 The Principles of the Valuation](#_Toc121212539)\n\n[SECTION 4 The Valuation of Policy Liabilities](#_Toc121212540)\n\n[SECTION 5 The Best Estimate Liability](#_Toc121212541)\n\n[SECTION 6 Profit Carriers and Profit Margins](#_Toc121212542)\n\n[SECTION 7 Acquisition Expenses](#_Toc121212543)\n\n[PART C – METHODOLOGIES FOR DETERMINING POLICY LIABILITIES IN RESPECT OF LIFE INSURANCE CONTRACTS](#_Toc121212544)\n\n[SECTION 8 New Business - Calculation of Profit Margins and Acquisition Expense Recovery Components](#_Toc121212545)\n\n[SECTION 9 Reporting Date Recalculations - Benefits Providing no Discretionary Entitlement to Share in the Investment Experience of Assets Backing them.](#_Toc121212546)\n\n[SECTION 10 Reporting Date Recalculations - Benefits Providing a Discretionary Entitlement to Share in the Investment Experience of Assets Backing them.](#_Toc121212547)\n\n[SECTION 11 Loss Recognition](#_Toc121212548)\n\n[SECTION 12 Reinsurance](#_Toc121212549)\n\n[PART D – GENERAL REQUIREMENTS FOR ALL FORMS OF POLICY AND ACTUARY’S STATEMENT](#_Toc121212550)\n\n[SECTION 13 Allocation of Expenses](#_Toc121212551)\n\n[SECTION 14 Materiality](#_Toc121212552)\n\n[SECTION 15 Initial Calculation of Policy Liability](#_Toc121212553)\n\n[SECTION 16 Statement Relating to the Valuation](#_Toc121212554)\n\n  \nINTRODUCTION\n\nThe Standard\n\nThe actuarial standard for the valuation of policy liabilities is established under the Life Insurance Act 1995 (the Act), and is an integral component of the financial reporting regime for life insurance companies implemented under that Act.\n\nA valuation of the policy liabilities of a company is performed at least once a year as part of the regulatory reporting of the company. The value of the policy liabilities appears in the regulatory financial statements in the balance sheet of the company. The increase (or decrease) in policy liabilities of the company over the financial year contributes directly to the operating profit.\n\nImportant in the development of an integrated financial framework for the life industry were considerations of:\n\n methodologies for determining the policy liabilities of the life company in respect of Life Insurance Contracts which are consistent with objectives of realistic profit reporting;\n\n proper and timely release of profit arising in respect of Life Insurance Contracts over the life of the business;\n\n in respect of Life Investment Contracts, measurement of policy liabilities that follows the requirements of relevant accounting standards (to the extent that the financial reporting of Life Investment Contracts under such standards is appropriate for the purposes of the Act);\n\n requirements for disclosure of this information in a transparent and comparable format; and\n\n approaches to prescribing minimum capital requirements to support those liabilities and provide an indicator of the financial position of the company.\n\nThe actuarial standard for the valuation of policy liabilities addresses the first three of these issues, with a concern for the objectives of disclosure and reporting. The issue of capital requirements is addressed by separate actuarial standards - the Solvency Standard, the Capital Adequacy Standard and the Management Capital Standard.\n\nAccordingly, this actuarial standard prescribes:\n\n-   in respect of Life Investment Contracts, that the valuation of policy liabilities is to generally comply with the requirements of the relevant accounting standards, and\n-   in respect of Life Insurance Contracts, a set of principles, and in accordance with these principles an actuarial methodology, for the valuation of the policy liabilities of the life company.\n\n#### Application to Friendly Societies\n\nThe Act was amended in 1999 to extend its application to friendly societies that undertake life insurance business. However, previous versions of this standard were only applicable to life companies (registered under the Act) other than friendly societies. A separate standard applied to friendly societies.\n\nFor reporting periods commencing on or before 31 December 2004 friendly societies were exempted from the general purpose financial reporting standards applying to life companies by virtue of ASIC Class Order 99/1225. That class order was rescinded with effect for reporting periods commencing on or after 1 January 2005. It is therefore appropriate that regulatory financial reporting requirements be similarly aligned with effect from the application date of this revised standard and that this Standard applies to Friendly Societies.\n\nWith the rescinding of the ASIC class order, it is appropriate, for the purposes of applying the Valuation Standard, for benefits provided in benefit funds where there is a provision for distribution of unallocated surpluses to policy owners to be valued as if they were participating. Benefits provided under benefit funds where is no provision for distribution of unallocated surpluses to policy owners are to be valued as if they were non-participating.\n\n## Application of the Valuation Standard\n\nThe Valuation Standard is made for the purposes of section 114 of the Life Insurance Act 1995.\n\nIt applies:\n\n1.  in respect of all life insurance business (including life insurance business carried on outside Australia) of a registered life company (including a life company which is a friendly society); and\n2.  in respect of the life insurance business of an eligible foreign life insurance company, other than life insurance business carried on outside Australia; and\n3.  to a valuation of the policy liabilities of the company made for the purposes of the Act; and\n4.  for all valuations made in respect of periods ending on or after 31 December 2005 in the case of life insurance companies (other than friendly societies) and on or after 31 May 2006 in the case of friendly societies.\n\nExcept for paragraph 1.5, it will continue to apply until replaced. Unless the Valuation Standard is replaced at an earlier date, paragraph 1.5 will cease to apply to valuations made in respect of reporting periods ending on or after 31 December 2009.\n\nThe Standard is written in the context of Australian legislation and bases of taxation. Appropriate adjustment should be made, for example to allow for different bases of taxation, where this Standard is being applied to overseas business.\n\n#   \nPART A – CONTRACT CLASSIFICATION AND POLICY LIABILITIES IN RESPECT OF LIFE INVESTMENT CONTRACTS\n\nFor the purposes of this Standard and reporting under the Act, policy liabilities in respect of life investment contracts are to be determined in accordance with the relevant accounting standards, subject to any available options being restricted to the fair value based options.\n\n## SECTION 1 Contract Classification and Application\n\nAPRA’s Prudential Rule 49 clarifies the basis on which policies written by life insurers are to be classified for the purpose of regulatory financial reporting. In particular it distinguishes between those policies issued by life companies that meet the definition of a Life Insurance Contract for regulatory reporting purposes and those that do not (referred to as “Life Investment Contracts”).\n\nPrudential Rule 49 also identifies key components of policies written by life companies and stipulates the circumstances in which such components must be unbundled for regulatory reporting purposes.\n\n1.1 For the purposes of this standard, an unbundled component of a policy is to be treated as if it were a stand-alone policy. After allowing for unbundling, Life Insurance Contracts (including contracts with Discretionary Participation Features) and any associated Life Investment Contracts must be dealt with in separate Related Product Groups.\n\n1.2 After allowing for any unbundling, the Policy Liability in respect of a Life Insurance Contract (including a contract with Discretionary Participation Features) must be determined in accordance with the requirements of Parts B and C of this standard.\n\n1.3 After allowing for any unbundling, the Policy Liability in respect of a Life Investment Contract must be determined in accordance with Section 2 of Part A of this standard.\n\n1.4 Section 2 of Part A of this standard is not to be used for the purposes of calculating the Solvency Liability under the Solvency Standard or the Capital Adequacy Liability under the Capital Adequacy Standard. For those purposes, the prospective valuation methodology outlined in Parts B and C of this standard will apply to all elements of the life insurance business issued by the company, regardless of how it is classified, albeit using assumptions as specified in the Solvency Standard or the Capital Adequacy Standard.\n\n1.5 Where the Actuary determines, and can demonstrate to the satisfaction of APRA, that the calculation of the Policy Liability in accordance with paragraph 2.1 would reduce the retained profits of the statutory fund to such an extent that it would unreasonably hinder the distribution of surplus assets from that fund, then, for policies that were in force at 31 December 2005, the Policy Liability may, with APRA’s agreement, be determined in accordance with the requirements of Parts B and C of this standard.\n\n1.6 Part D of this standard applies to all of the life insurance business issued by the company for the purposes of the Act.\n\n## SECTION 2 Policy Liabilities in Respect of Life Investment Contracts\n\nLife Investment Contracts consist of at least one Financial Instrument, being the element that gives rise to a financial asset or financial liability. They may also contain additional elements in respect of management services, embedded derivatives or participation features.\n\nThe net contractual obligations under a Life Investment Contract which arise under the Financial Instrument Element of the contract (and any associated management services that are not unbundled) is referred to as the Life Investment Contract Liability, consistent with the terminology adopted under AASB 1038.\n\nLife Investment Contracts with Discretionary Participation Features that are regulated under the Life Insurance Act 1995, are treated in their entirety as if they were Life Insurance Contracts and so are not subject to this section of the standard. They may, however, still be subject to certain minimums or disclosures the quantification of which is subject to this section of the standard.\n\nEmbedded derivatives within a Life Investment Contract are financial instruments and must be allowed for within the Financial Instrument Element for the purpose of this Valuation Standard.\n\nPolicy Liability of a Life Investment Contract\n\n2.1 The Policy Liability in respect of a Life Investment Contract is determined as\n\nPolicy Liability = LICL + MSE\n\nwhere\n\nLICL = the Life Investment Contract Liability, being the liability arising in respect of the Financial Instrument Element\n\nMSE = the net liability (asset) in respect of the Management Services Element.\n\nLife Investment Contract Liability\n\n2.2 The Life Investment Contract Liability, being the component of the Policy Liability that arises under a Life Investment Contract issued by an Australian life insurance company that relates to the Financial Instrument Element (and any associated management services that are not unbundled), is to be determined in accordance with the fair value through profit and loss provisions of the relevant accounting standards (whether or not the Financial Instrument Element is measured on that basis in the general purpose financial statements).\n\nManagement Services Element\n\n2.3 The Policy Liability that arises under a Life Investment Contract is to include the net amount of all liabilities and assets arising in respect of the Management Services Element of the contract. These liabilities or assets include, but need not be limited to, the value of Deferred Fee Revenue and Deferred Acquisition Costs. The measurement of these liabilities and assets is to be in accordance with the relevant accounting standards.\n\nReinsurance of Life Investment Contracts\n\n2.4 The Policy Liability is determined gross of reinsurance (as defined for the purposes of the Act). The recognition and measurement of outwards reinsurance that does not involve the transfer of Insurance Risk are to be undertaken separately in accordance with the fair value through profit and loss provisions of the relevant accounting standards (whether or not they are reported on that basis in general purpose financial statements).\n\n# PART B – PRINCIPLES FOR DETERMINING POLICY LIABILITIES IN RESPECT OF LIFE INSURANCE CONTRACTS\n\n## SECTION 3 The Principles of the Valuation\n\nOverview\n\nThe purpose of this part of the standard in prescribing a set of principles for the valuation of the policy liabilities in respect of life insurance contracts is to achieve the two essential objectives of:\n\n determining, as at the reporting date, a realistic determination of the policy liabilities of the company in respect of Life Insurance Contracts; and\n\n providing for the emergence of profit in respect of Life Insurance Contracts as it is earned.\n\nThe Best Estimate Liability\n\nThe first of these objectives may be met by determining a best estimate value of the liabilities being the value of the expected future contractual payments to policy owners on the basis of best estimates of future income and outgo.\n\nThe Profits\n\nThe second of these objectives may be met by determining a best estimate value of the expected future profits to emerge under the policies. The explicit provision for future profits, through Bonuses and/or Profit Margins, is a mechanism to facilitate the release of profit as it is earned through the provision of services and the receipt of the related income.\n\nThe sum of the Best Estimate Liability and the value of the expected future profits is called the Policy Liability.\n\nIt is not the purpose of this Standard to prescribe a single methodology for the valuation of policy liabilities in respect of Life Insurance Contracts. The principles of the Standard will normally be achieved by adopting a projection methodology. However, it is recognised that alternative approaches - such as an accumulation methodology - may in some cases be appropriate in achieving the principles.\n\n  \n\n3.1 It is the principles which are paramount in determining the Policy Liability; methodology is incidental to the principles. Projection or accumulation methodologies may be appropriate provided the Actuary can demonstrate that the principles have been met.\n\n3.2 The Policy Liability must provide for both:\n\n1.  a best estimate value of the liability of the company in respect of obligations under Life Insurance Contracts; and\n2.  a uniform emergence of profit in respect of Life Insurance Contracts relative to one or more appropriate Profit Carriers.\n\n3.3 While Profit Carriers are an explicit component of the valuation where a projection approach is used, the Profit Carriers are implicit where an accumulation approach is appropriately used.\n\n3.4 The profit emerging in the reporting period must recognise both:\n\n1.  the expected profits for the period; and\n2.  the Experience Profit for the period.\n\n3.5 The valuation method must provide for the emergence of profit when it is earned. The emergence of earned profit must not be deferred; nor must unearned profit be prematurely recognised.\n\n3.6 Profits are earned on the later of:\n\n1.  the provision of a service to the policy owner; and\n2.  the receipt (or recognition) of income relating to that service.\n\n3.7 When the valuation results in expected future profits for a Related Product Group that are below the Adequacy Threshold for that product group, the value of the shortfall must be recognised immediately as a loss.\n\n3.8 Subject to circumstances covered by paragraph 3.7, profit for the period must not otherwise be affected by a change in the Best Estimate Assumptions in respect of future periods, except that:\n\n1.  where previously recognised losses exist for a Related Product Group and that change in Best Estimate Assumptions results in expected future profits emerging, the present value of those profits must be released to the extent necessary to offset those previously recognised losses; or\n\n1.  where that change is in the Best Estimate Assumption for the discount rate (and future investment earnings and related economic assumptions, where relevant) due to market changes only, and the benefit has no discretionary entitlement to share in investment experience, the present value of the expected future profits which are generated by the change must be released.\n\nWhere the change in Best Estimate Assumptions would result in a release of expected future profits otherwise than as above, the present value of those profits must not be released, but respread to emerge as a uniform proportion of the appropriate Profit Carrier(s).\n\n3.9 In determining the Best Estimate Liability and Best Estimate Assumptions, the Actuary must have regard to the impact on the liability of the distribution of potential future outcomes. Where the benefits being valued contain options that may potentially be exercised against the company, or the potential liability outcomes have an adverse asymmetrical distribution, then the Best Estimate Liability must include an appropriate value in respect of those options and/or asymmetries.\n\n3.10 Approximate methods may be used in determining the Policy Liability of the company where the result so produced is not material or not materially different from that which would result from a full valuation process. In particular, the special circumstances of Reinsurers are recognised as warranting approximate methods.\n\n## SECTION 4 The Valuation of Policy Liabilities\n\nOverview\n\nBenefits for life companies other than friendly societies are either Participating Benefits or Non-Participating Benefits. Due to the different nature of these benefits, different approaches are required to the valuation of policy liabilities.\n\nParticipating Benefits\n\nWhere Participating Benefits are provided the policy owner is entitled to share in the profits of the business.\n\nThe participation process is managed by the life company, through the declaration of Bonuses. Company practice, and ultimately the requirements of the Act, control the relationship between policy owner and shareholder entitlements to profits.\n\nThe profit for Participating Benefits includes provision for:\n\n Bonuses (policy owner profits); and\n\n Shareholder Profits.\n\n  \nPolicy Liability \\=\n\nBest Estimate Liability\n\nplus Value of future Best Estimate Bonuses\n\nplus Value of future Best Estimate\n\nShareholder Profits\n\nNon-Participating Benefits\n\nWhere Non-Participating Benefits are provided, profit is entirely the entitlement of the shareholder.\n\nPolicy Liability =\n\nBest Estimate Liability\n\nplus Value of future Best Estimate Shareholder Profits\n\nThe contractual arrangements in respect of the Non-Participating Benefits may entitle the policy owner to additions to the benefit, at the discretion of the company, reflecting the investment experience of the assets backing the benefit. While this is not a distribution of profit, the determination of the additions may involve similar management processes to the distribution of bonus for Participating Benefits. Accordingly, similar valuation methods may be appropriate.\n\nFriendly Society Benefits\n\nFriendly society benefits are neither participating nor non-participating.\n\nFor the purpose of applying the Valuation Standard, benefits provided under benefit funds where there is a provision for distribution of unallocated surpluses to policy owners are to be valued as if they were participating. Benefits provided under benefit funds where is no provision for distribution of unallocated surpluses to policy owners are to be valued as if they were non-participating.\n\n4.1 Participating Benefits\n\n4.1.1 In respect of Participating Benefits, profit must include the policy owners’ share of profits. The valuation of the policy liabilities must, therefore, make allowance for the best estimate at the reporting date of:\n\n1.  the value of expected future Policy Owner Profit Share; and\n2.  the value of expected future Shareholder Profit Share.\n\n4.1.2 Declarations of Bonus are an appropriation of profit for participating business. Accordingly, current year Best Estimate Bonuses are excluded from the Policy Liability, allowing the emergence of this amount as Operating Profit in the period.\n\n4.1.3 The relationship between the assumed allocation of profit to policy owners and shareholders respectively must, in respect of each future year, be consistent with:\n\n1.  the policy conditions; and\n2.  the company’s practice or stated philosophy.\n\n4.2 Non-Participating Benefits\n\n4.2.1 In respect of Non-Participating Benefits, the valuation of policy liabilities must make allowance for the best estimate at the reporting date of the value of expected future Shareholder Profit Share.\n\n4.2.2 Where a Non-Participating Benefit includes an entitlement, at the discretion of the company, to share in the investment experience of the assets backing the benefits, the valuation of the policy liabilities must make allowance for the best estimate at the reporting date of the present value of current year and expected future Discretionary Additions.\n\nConsistency with Asset Values\n\n4.3 Where the basis of asset valuation used for the regulatory financial statements is not consistent with the basis of asset valuation implicit in the valuation of the liabilities, the Actuary must make appropriate adjustments to the Policy Liability.\n\nReinsurance of Life Insurance Contracts\n\n4.4 The Policy Liability is determined gross of reinsurance (as defined for the purposes of the Act), although the gross Policy Liability may be calculated by first determining the necessary components on a net of reinsurance basis and then adjusting the result by the amounts of the corresponding components of the Reinsured Policy Liability.\n\n  \n\n## SECTION 5 The Best Estimate Liability\n\nOverview\n\nThe Best Estimate Liability is determined as the value of the expected future payments and receipts under the policy, gross of reinsurance, based on obligations at the reporting date.\n\nBest Estimate Liability =\n\nValue of expected future benefit payments\n\nplus Value of expected future expenses\n\nless Value of expected future receipts\n\nNote that the benefit obligations projected include all contractual benefits. In particular, in the case of Participating Benefits they include Bonuses declared prior to (but not on, or after) the date of valuation.\n\nIn projecting the expected future cash flows, the Actuary makes assumptions about the expected future experience, taking into account all factors which are considered to be material to the calculation, including:\n\n investment earnings\n\n inflation\n\n taxation\n\n expenses\n\n mortality and morbidity\n\n policy discontinuance.\n\nThe Actuary’s assumptions must reflect a best estimate of the likely experience.\n\n5.1 In accordance with the principles of section 3, where the valuation of the policy liabilities involves assumptions as to future experience, the assumptions used must be Best Estimate Assumptions.\n\n5.2 In establishing Best Estimate Assumptions, due regard must be had for the materiality of:\n\n1.  the benefits being considered; and\n2.  the effect of particular assumptions on the determined result.\n\n  \n\n5.3 Valuing Liability Options\n\n5.3.1 The Best Estimate Liability and Best Estimate Assumptions are to have regard to any options or asymmetrical distribution of liability outcomes.\n\n5.3.2 Where the distribution of potential liability outcomes is equally likely to result in a gain or loss, then it will normally be sufficient to adopt the mean of the assessed distributions of future experience for the Best Estimate Assumptions and calculate the Best Estimate Liability accordingly.\n\n5.3.3 However, the Actuary needs to consider and assess the extent that variations in the assumptions may be correlated, and/or may compound one another, in adverse circumstances. In such cases the Best Estimate Assumptions must be adjusted so that the Best Estimate Liability is representative of the mean of the distribution of the potential liability outcomes.\n\n5.3.4 Where the benefits contain options that may be exercised against the company, then either the value of those options must be determined (via a suitable option pricing method) and added to the Best Estimate Liability, or the Best Estimate Assumptions adjusted so as to appropriately capture the value of the options as part of the Best Estimate Liability.\n\n5.3.5 The requirements throughout this standard in respect of Best Estimate Assumptions and Best Estimate Liabilities are to be interpreted in this context.\n\nInvestment Earnings\n\n5.4 Where the cash flows to be valued depend on future investment earnings, the Best Estimate Assumption for investment earnings must reflect the expected investment earnings applicable to the actual assets on which the cash flows depend.\n\n5.5 The Discount Rate\n\n5.5.1 The gross rate used to discount expected future cash flows must, to the extent the benefits under the policy are contractually linked to the performance of the assets held, reflect the expected investment earnings applicable to the assets backing the benefit being valued. Otherwise, a Risk Free Discount Rate is to be used.\n\n5.5.2 This does not preclude the use of discount rates that make allowance for assumptions that are expressed as a percentage of the value of assets, rather than allowing for those assumptions explicitly in the projection. This practice may apply in respect of certain expenses, taxes or profit margins.\n\n5.6 Taxation\n\n5.6.1 For business where tax is based only on profits, liabilities may be determined gross of tax. Otherwise, appropriate allowance must be made for the effect of taxation.\n\n5.6.2 Where allowance for tax on investment earnings is required, it must be made in accordance with Best Estimate Assumptions, but based on an asset profile which would be expected to yield a return equal to the discount rate assumption in paragraph 5.5.1.\n\n5.7 Servicing Expenses\n\n5.7.1 The Best Estimate Assumption for Maintenance Expenses must be sufficient to cover the expected maintenance cost of servicing each policy, in respect of in force business, in the year following the reporting date. The expected maintenance cost of servicing each policy is the expected Maintenance Expenses appropriately adjusted for one-off expenses.\n\n5.7.2 The Best Estimate Assumption for Investment Management Expenses must be sufficient to cover the cost of managing an asset profile which would be expected to yield a return equal to the discount rate assumption in paragraph 5.5.1.\n\n5.7.3 Where Servicing Expense assumptions are expressed in monetary amounts, the assumptions beyond the coming year must be adjusted in line with best estimate inflation assumptions.\n\nAcquisition Expenses\n\n5.8 The Best Estimate Assumption for Acquisition Expenses at Commencement must be the greater of:\n\n1.  Establishment Fees received at Commencement; and\n2.  actual Acquisition Expenses incurred, less expenses which the Actuary considers to be ‘one-off’ in nature.\n\nBoth must be consistently adjusted for tax in accordance with paragraph 5.6.\n\n  \n\nOther Assumptions\n\n5.9 The Best Estimate Assumption in respect of all other assumptions used in the valuation of policy liabilities, must be assumptions about future experience which:\n\n1.  are made using professional judgement, training and experience; and\n2.  are made having regard to reasonably available statistics and other information; and\n3.  are neither deliberately overstated nor deliberately understated.\n\n## SECTION 6 Profit Carriers and Profit Margins\n\nOverview\n\nPolicies are written with the expectation of producing profits. Profit Carriers are selected and Profit Margins determined when a policy commences to enable the appropriate emergence of the expected shareholder profit over the term of the benefits. (Policy owner profit emerges through Bonuses.) This is achieved as follows:\n\nProfit Margin =\n\nValue of future Best Estimate Shareholder Profits\n\ndivided by Value of Profit Carrier(s)\n\nwhere the Profit Carrier is a financially measurable indicator of either:\n\n the expected cost of the services provided to the policy owner; or\n\n the expected income item relating to the services.\n\nThe range of services which may be provided to the policy owner, includes:\n\n insurance of mortality, morbidity (or similar risks)\n\n generation of investment income\n\n setting up the policy (selling or acquisition)\n\n ongoing administration\n\n investment management\n\n provision of bonuses\n\nSelection of the profit carrier is critical in determining the magnitude and timing with which profits are released.\n\n  \n\n6.1 Profit Margins\n\n6.1.1 In accordance with the principles of section 3, the appropriate release of expected future shareholder profits is provided for in valuing the policy liabilities, either explicitly or implicitly, through the incorporation of Profit Margins.\n\n6.1.2 A Profit Margin must be expressed, explicitly or implicitly, as a uniform proportion of one or more appropriate Profit Carrier(s).\n\n6.2 Profit Carriers\n\n6.2.1 The appropriate Profit Carrier(s) must be related to the services provided to policy owners by the company. The Actuary, in selecting the appropriate Profit Carrier(s), must consider:\n\n1.  the services and income items applicable to the benefit; and\n2.  the relative risks of services, or of costs, to the company; and\n3.  the relative timing of the provision of the services and the receipt or recognition of income for those services.\n\n6.2.2 Provision of capital to meet Solvency and Capital Adequacy Requirements is not a service for this purpose.\n\n6.2.3 Acquisition is a service for this purpose only when explicit Establishment Fees are received.\n\n6.2.4 The practical implications of selecting multiple profit carriers should be considered relative to the materiality of the results. Where multiple Profit Carriers are used, for ease of computation it may be desirable to retain a constant Profit Margin for all but one of the Profit Carriers selected, allowing the Profit Margin in respect of that remaining Profit Carrier to be the only variable.\n\n6.2.5 Profit Carrier(s), once chosen, must be used consistently for a Related Product Group unless in the Actuary's judgement the Profit Carrier(s) are no longer appropriate.\n\n6.2.6 Where Profit Carrier(s) are changed this must not result in a release of profit at the date of change. This is achieved by equating the values of Best Estimate Shareholder Profits before and after the change in determining the new Profit Margins.\n\n  \n\n## SECTION 7 Acquisition Expenses\n\nOverview\n\nA company normally incurs Acquisition Expenses and possibly receives Establishment Fees when it acquires new business.\n\nWhere new business is written with the expectation of producing profits, then, if the Establishment Fees are less than the actual Acquisition Expenses, there will be an expectation of receiving future income, part of which goes to meeting the unrecouped Acquisition Expenses.\n\nThe principles for the allocation of expenses to Acquisition Expenses are set out in section 13. Acquisition Expenses are defined in terms of the activities related to the acquiring of new business. The acquisition of new business can generally be considered to include activities of the company such as product marketing, sales, underwriting and administration, undertaken prior to and at the point of issuing the policy and establishing it in the policy records of the company.\n\nThe new business expected to derive from a particular expense may not necessarily be acquired in the same period in which the expense occurs. The new business must, however, be expected to arise as a result of that expenditure. To the extent the expenditure has only a tenuous link with the acquisition of new business - for example, general growth and development expenses – it is not considered to be an acquisition expense.\n\n  \n\n7.1 To the extent that Acquisition Expenses are not recovered by the Establishment Fees, they must be charged against expected future profits, provided that these profits are sufficient to recover them. Any Acquisition Expenses which cannot be recovered from Establishment Fees or expected future profit will emerge as a loss at issue.\n\n7.2 Appropriate allowance must be made in this process for tax on both Establishment Fees and Acquisition Expenses.\n\n7.3 Where expected future profits for a Related Product Group are insufficient to recover unrecouped Acquisition Expenses, the loss must be recognised in accordance with the processes of section 11.\n\n7.4 Where a projection approach is used to calculate the Policy Liability, the expected income which is used to recover Acquisition Expenses is incorporated as a reduction in the Best Estimate Liability calculation. Accordingly, Acquisition Expense Recovery Components are an implicit component of the valuation.\n\n7.5 Where an accumulation approach is used to calculate the Policy Liability the value of the unrecouped portion of Acquisition Expenses which is to be recovered from future income must be explicitly allowed for as a reduction in the liability by using Acquisition Expense Recovery Component(s).\n\n#   \nPART C – METHODOLOGIES FOR DETERMINING POLICY LIABILITIES IN RESPECT OF LIFE INSURANCE CONTRACTS\n\nOverview\n\nIf the Best Estimate Assumptions made at Commencement remain valid through the policy term, and if experience under the benefit exactly reflects those expectations, the methodologies should ensure that profit emerges at each reporting date as:\n\n investment earnings (net of tax) on any retained profits and shareholder capital; plus\n\n release of the expected profits (net of tax) in respect of the valuation period.\n\nIn reality, actual experience in the valuation period will likely differ from that expected, and to this extent there will emerge an experience profit (or loss).\n\nFurther, as experience changes, the Best Estimate Assumptions as to the future may change.\n\nThe principles of this standard require that the present value of profit resulting from a change in non-economic Best Estimate Assumptions of the Actuary, must not be released immediately at the reporting date, but rather must be released appropriately over the future life of the benefit.\n\nAppropriate profit emergence is achieved through a methodology which involves recalculation at each reporting date of the expected future profit. Profit Margins and Acquisition Expense Recovery Components are determined as required to ensure the appropriate release of those future profits.\n\nIn the case of benefits with an entitlement to share in the investment experience of the assets backing them, the methodology must deal specifically with investment experience profits to allow its release over the future life of the benefit as:\n\n in the case of Participating Benefits (including friendly society benefits under benefit funds where there is a provision for distribution of unallocated surpluses to policy owners), future Bonuses and Shareholder Profits; or\n\n in the case of Non-Participating Benefits, future Discretionary Additions.\n\nNote that in this Part, discussions of the detail of the methodologies for calculating policy liabilities will typically be in terms of a benefit. A policy may incorporate multiple benefits. Further, certain processes described in this Part may be performed at a Related Product Group level, which incorporates multiple (like) policies.\n\nWhile recalculation processes described in this Part will normally be considered for a Related Product Group, the Actuary may group benefits at a lower level where this is supported by company practice or stated philosophy and is done consistently over time.\n\n## SECTION 8 New Business - Calculation of Profit Margins and Acquisition Expense Recovery Components\n\n8.1 Profit Margins\n\n8.1.1 Where explicit Profit Margins are required, they are determined by dividing:\n\n1.  the value at Commencement of the expected future profits from the benefit; by\n2.  the value at that date of the appropriate Profit Carrier(s).\n\n8.1.2 The value at Commencement of expected future profits must be determined on the basis of Best Estimate Assumptions.\n\n8.1.3 The Best Estimate Assumptions, with the exception of the Acquisition Expense assumption, must be determined as at a single date, but that date may be:\n\n1.  the beginning of the reporting period; or\n2.  the date of commencement of the business; or\n3.  the end of the reporting period.\n\n8.1.4 The Acquisition Expense assumption will be determined at the end of the reporting period.\n\n8.2 Treatment of Losses\n\n8.2.1 If the projection reveals a value of expected future profit at Commencement for new business in a Related Product Group that is below the Adequacy Threshold, then that loss must either be recognised, or dealt with in accordance with the provisions of paragraph 8.2.2. Any losses at Commencement so recognised must be accumulated. If the Related Product Group subsequently generates profits above the Adequacy Threshold, the cumulative losses must be offset (see section 11).\n\n8.2.2 Alternatively, new business may be grouped with existing in force business for the same Related Product Group for the purpose of calculating Profit Margins. Where new business is so grouped, any losses at Commencement for that new business cannot be accumulated or subsequently offset.\n\n8.2.3 The approach used by the Actuary for treatment of losses on new business must be applied consistently over time.\n\n8.3 Acquisition Expense Recovery Components\n\n8.3.1 Where explicit Acquisition Expense Recovery Components are required, they are determined at Commencement by dividing:\n\n1.  the Best Estimate Assumption for Acquisition Expenses at Commencement (to the extent not recovered by Establishment Fees); by\n2.  the present value at that date of the appropriate Acquisition Expense Recovery Carrier(s).\n\n8.3.2 The Acquisition Expense Recovery Carrier(s) must reflect the element of the premium or other income item, including surrender penalties, designed or intended to recover Acquisition Expenses.\n\n8.3.3 Appropriate adjustment to Acquisition Expenses and Acquisition Expense Recovery Components will be needed where Acquisition Expenses are expected to be incurred in a year other than the year of issue. Any adjustment by the Actuary must have regard to Acquisition Expenses accrued or deferred in the accounts.\n\n## SECTION 9 Reporting Date Recalculations - Benefits Providing\n\n## no Discretionary Entitlement to Share in the\n\n## Investment Experience of Assets Backing them.\n\nOverview\n\nA change in the discount rate (and other related economic assumptions) at the reporting date may occur because of:\n\n changes in the market conditions; and/or\n\n other changes (such as a change in the mix of assets backing the benefits that are dependent on investment performance).\n\nThe recalculation process described in this section results in the Policy Liability reflecting the effect of changes in discount rates (and other related economic assumptions) due to market conditions only . The effect of other changes in discount rates or other assumptions is spread over the future benefit term, through the recalculation process.\n\nWhere the only change in the Best Estimate Assumptions is a change in the discount rates (and other related economic assumptions) due to a change in market conditions, the recalculation process will result in the Profit Margins and Acquisition Expense Recovery Components being unchanged.\n\n9.1 Recalculation of Profit Margins\n\n9.1.1 Where Profit Margins are determined at Commencement, the principles of section 3 require a recalculation of those Profit Margins at each subsequent reporting date to ensure that future expected profits are neither released prematurely nor deferred inappropriately.\n\n9.1.2 The methodology detailed below produces results in accordance with the principles of section 3. Other methods may be appropriate where the Actuary can demonstrate that the principles have been met.\n\n9.1.3 A recalculation of Profit Margins at the reporting date may be carried out as follows:\n\n1.  derive the value of expected future profits at the reporting date as:\n\nBest Estimate Liability (on Basis 1)\n\nplus Value of expected future profits (on Basis 1)\n\nless Best Estimate Liability (on Basis 2);\n\nand\n\n1.  recalculate the Profit Margins as:\n\nValue of expected future profits (from (a) )\n\ndivided by\n\nValue of the Profit Carrier(s) (on Basis 2).\n\nWhere\n\nBasis 1 uses the Best Estimate Assumptions and Profit Margins at the previous reporting date, except for the discount rate and related economic assumptions - see paragraph 9.2; and\n\nBasis 2 uses the Best Estimate Assumptions at the current reporting date.\n\n9.2 Discount Rate\n\n9.2.1 The discount rate (and related economic assumptions) used for calculations on Basis 1 is determined as that used at the previous reporting date adjusted only to the extent that there have been changes in market conditions.\n\n9.2.2 A consistent approach is to be used in respect of economic assumptions related to the discount rate; for example, the investment earnings and inflation assumptions.\n\n9.3 Recalculation of Acquisition Expense Recovery Components\n\n9.3.1 Where Acquisition Expense Recovery Components are determined at Commencement the principles of section 3 require a recalculation of those components at each subsequent reporting date to ensure that future expected profits are neither released prematurely nor deferred inappropriately.\n\n9.3.2 The methodology detailed below produces results in accordance with the principles of section 3. Other methods may be appropriate where the Actuary can demonstrate that the principles have been met.\n\n9.3.3 A recalculation of Acquisition Expense Recovery Components at the reporting date may be carried out as follows:\n\n1.  derive the value of the expected future acquisition expense recoveries at the reporting date as:\n\nAcquisition Expense Recovery Components\n\nmultiplied by\n\nValue of Acquisition Expense Recovery Carrier(s) (on Basis 1);\n\nand\n\n1.  recalculate the Acquisition Expense Recovery Components as:\n\nValue of the expected future acquisition expense recoveries (from (a))\n\ndivided by\n\nValue of Acquisition Expense Recovery Carrier(s)\n\n(on Basis 2).\n\n  \nWhere\n\nBasis 1 uses the Best Estimate Assumptions at the previous reporting date, except for the discount rate and related economic assumptions - see paragraph 9.2; and\n\nBasis 2 uses the Best Estimate Assumptions at the current reporting date.\n\n## SECTION 10 Reporting Date Recalculations - Benefits Providing a Discretionary Entitlement to Share in the Investment Experience of Assets Backing them.\n\nOverview\n\nThe recalculation methodology described in this section establishes how the Policy Liability changes and, hence, how profit emerges over the period for discretionary business. The objective of the methodology is to determine Operating Profit in accordance with the framework of the Act.\n\nFor a Participating Benefit (including a friendly society benefit under a benefit fund where there is a provision for distribution of unallocated surpluses to policy owners), two important aspects of this framework are;\n\n1.  The allocation of Operating Profit is a distinct process from the distribution of retained profits. It is the value of declared Bonuses and shareholder transfers out of the fund which are distributions of retained profits (inclusive of the Operating Profit allocated in the period)\n\nIt is the Operating Profit which is the amount allocated between policy owners retained profits (or unallocated surplus in the case of friendly societies) and shareholders retained profits.\n\n1.  Operating Profit includes shareholder profit and policy owner profit. It comprises:\n\n-   the value of current period Best Estimate Bonuses (including best estimate interim and terminal bonuses and the value of best estimate reversionary bonuses) and Best Estimate Shareholder Profits; and\n-   non-investment Experience Profit.\n\nFor Non-Participating Benefits which have an entitlement to discretionary additions, the approaches described in this section may be applied for recalculating Discretionary Additions and Profit Margins. The section is to be interpreted by substituting “discretionary addition” for “bonus”. It must be recognised that the “discretionary addition” is not a “bonus”, and consequently the cost of any “discretionary addition” in the current period forms part of the Policy Liability at the reporting date, while the cost of any “bonus” in the current period is an allocation and distribution of current period operating profit and does not form part of the Policy Liability at the reporting date.\n\nIt is noted that for Participating Benefits (but not Non-Participating Benefits which have an entitlement to discretionary additions), the recalculation methodology means a change in assumptions (predominantly non-investment assumptions) may affect current year profit, through changes in the rate of Best Estimate Bonus. In these specific circumstances, this result is considered appropriate and in compliance with the intent of the principles of section 3.\n\n10.1 Recalculation of Profit Margins\n\n10.1.1 Where Profit Margins are determined at Commencement, the principles of section 3 require a recalculation of those Profit Margins at each subsequent reporting date to ensure that future expected profits are neither released prematurely nor deferred inappropriately.\n\n10.1.2 The methodology detailed below is deemed to produce results in accordance with the principles of section 3. Other methods may be appropriate where the Actuary can demonstrate that the principles have been met.\n\n10.1.3 A recalculation of Profit Margins at the reporting date may be carried out as follows:\n\n1.  derive the value of expected future policy owner and shareholder profits at the reporting date as:\n\nValue of Supporting Assets\n\nless Best Estimate Liability (on Basis 2)\n\nless Value of current period Bonuses and Shareholder Profits (on Basis 2);\n\nand\n\n1.  recalculate the Profit Margins as:\n\nValue of expected future profits (from (a) )\n\nless Value of future Best Estimate Bonuses (on Basis 2)\n\ndivided by\n\nValue of the Profit Carrier(s) (on Basis 2).\n\nWhere\n\nValue of Supporting Assets is calculated according to paragraph 10.2;\n\nBasis 2 uses the Best Estimate Assumptions at the current reporting date;\n\nValue of current period Bonuses is determined as the cost of Bonus according to paragraph 10.3; and\n\nThe relationship between Bonuses and Shareholder Profits must be in accordance with paragraph 4.1.3.\n\n10.2 Value of Supporting Assets\n\n10.2.1 The Value of Supporting Assets is determined as:\n\n1.  the Policy Liability at the end of the previous reporting period; plus\n2.  the cost of declared Bonuses at the end of the previous period; plus\n3.  the actual policy related cash flows and investment experience as reported in the regulatory financial statements; less\n4.  the expected Shareholder Profits emerging over the period and the non-investment Experience Profit.\n\n10.2.2 The Value of Supporting Assets must be calculated so as to attribute no value of assets to terminated benefits.\n\n10.3 Cost of Bonus\n\n10.3.1 The cost of Bonus at the reporting date (whether best estimate or declared) must reflect the cash value to the policy owners of those Bonuses at the reporting date.\n\n10.3.2 Where Bonus at the reporting date does not acquire an immediate cash value, but rather value vests in the policy owner over some defined period of time, the Actuary, in determining the cost of Bonus, must allow an appropriate value for that unvested Bonus.\n\n  \n\n10.3.3 Terminal bonus is included in the calculation of cost of Bonus to the extent it is immediately vested in the policy owner and is guaranteed.\n\n## SECTION 11 Loss Recognition\n\nOverview\n\nWhere at a reporting date the value of future profits for a Related Product Group falls below the Adequacy Threshold for that Related Product Group, the resulting shortfall is not spread over the benefit term (as are expected future profits above the Adequacy Threshold) but is recognised as an immediate loss at that date. This is in accordance with the principles of section 3 and is achieved by setting the relevant Profit Margins to an amount such that the value of future profits is equal to the Adequacy Threshold at the reporting date. This process is carried out for each Related Product Group.\n\nA record of cumulative losses is kept for each Related Product Group. Before a Related Product Group can have a value of future profits in excess of the Adequacy Threshold, cumulative losses must have been offset. Once cumulative losses have been eliminated for the Related Product Group it will return to a position of adequate future profits.\n\n11.1 A record of the cumulative amount of losses recognised in accordance with the principles of section 3 must be maintained for each Related Product Group.\n\n11.2 Cumulative losses may be run-off in accordance with the run-off of the business of the relevant Related Product Group.  \n\n11.3 If at a reporting date it is established, in respect of a Related Product Group which has cumulative losses recorded, that future profits are now expected the present value of that profit must be utilised:\n\n1.  firstly, in offsetting the cumulative losses; and then\n2.  to the extent available, in producing Profit Margins in excess of the Adequacy Threshold.\n\n11.4 There must be no release of profit as a consequence of the combining of Related Product Groups. Where there is grouping of previously separate Related Product Groups, the Policy Liability of the combined Related Product Group must equal the sum of the Policy Liability of the two separate groups immediately prior to the grouping. Cumulative losses that previously existed in respect of the separate groups must be extinguished, except in the case where cumulative losses existed for both separate Related Product Groups.\n\n11.5 The Adequacy Threshold for the Value of Future Best Estimate Bonuses and Shareholder Profits under Related Product Groups in respect of benefits that are contractually linked to the performance of the assets held (i.e. where a risk free discount rate is not used to discount future expected cash flows) is equal to the difference between:\n\n1.  the Best Estimate Liability on Basis 2 (either in accordance with paragraph 9.1.3 or paragraph 10.1.3, whichever is applicable), but using a risk free discount rate (or rates) based on the current observable, objective rates that relate to the nature, structure and term of the future liability cash flows; and\n2.  the Best Estimate Liability on Basis 2.\n\n11.6 For all other Related Product Groups the Adequacy Threshold is zero.\n\n## SECTION 12 Reinsurance\n\n12.1 Outwards reinsurance that meets the definition of a Life Insurance Contract is to be measured as if it were a negative liability, even though the measurement result may be recognised as an asset in the company’s financial statements. For this purpose the Reinsured Policy Liability will therefore consist of both a Reinsured Best Estimate Liability and the Value of Reinsured Profit Margins. For the purpose of this standard, inwards reinsurance is to be treated the same as direct insurance business.\n\n12.2 The principles of this standard apply to both the calculation of the gross Policy Liability and the Reinsured Policy Liability. In particular, where future profits are expected to arise in respect of a reinsurance arrangement (looked at from the reinsurer’s perspective) the present value of those future profits is to be included in the Reinsured Policy Liability as Value of Reinsured Profit Margins. However, where losses are expected, these are to be recognised, except as allowed under paragraph 12.5.\n\n12.3 If the reinsurance relates directly and solely to the direct insurance business of a single Related Product Group then the reinsurance may be included within that same Related Product Group for the purposes of Section 11 of this standard. If the reinsurance does not relate directly and solely to the direct insurance business of a single Related Product Group then the reinsurance must be\n\n  \n\nappropriately allocated to Related Product Groups for the purposes of Section 11 of this Standard. That allocation must reflect:\n\n1.  the insurance and financial risks to which the reinsurance relates; and\n2.  an appropriate relationship between those risks and the Related Product Groups.\n\n12.4 In undertaking the allocation described in paragraph 12.3 regard must be had for a diligent assessment of:\n\n1.  the purpose of the company in entering the reinsurance; and\n2.  the contribution of that reinsurance to the business of the company;\n\nwhile retaining the integrity of the principles of section 3 of this Standard.\n\n12.5 As a result of the allocation of reinsurance business to Related Product Groups, losses expected in relation to the reinsurance business need only be recognised if they exceed the value of expected future profits in respect of the associated direct insurance business in the Related Product Group, and vice versa. However, the Profit Margins in respect of the reinsurance must continue to be determined separately from the Profit Margins in relation to the associated direct insurance business.\n\n  \n\n# PART D – GENERAL REQUIREMENTS FOR ALL FORMS OF POLICY AND ACTUARY’S STATEMENT\n\n## SECTION 13 Allocation of Expenses\n\nOverview\n\nAllocation of the expenses of the company is integral to the principles of this standard for the determination of the emergence of profit. The methodologies of this standard require the expenses of the company to be allocated both into the expense categories (e.g. acquisition, maintenance and investment management) and into related product groups covering both Life Insurance Contracts and Life Investment Contracts.\n\nFor those expenses not able to be directly allocated, a process of apportionment between the expense categories and between product groups is necessary. This section provides a set of principles within which the allocation is undertaken, and against which the mechanics of the apportionment process are assessed. It is not the objective of this section to be prescriptive either in terms of the mechanics of the apportionment process or in the specifics of the allocation of particular types of expenses.\n\nIt is acknowledged that the allocation of certain expenses to expense categories or particular products will require greater judgement than others. Allocation of such expenses must be based on a considered analysis of the particular circumstances of the company – the objective in incurring that expense and the outcome achieved. If at the end of this process there remains doubt as to the appropriate expense category, the expense must be allocated to maintenance expenses.\n\nThere will be circumstances in which an expense derives from an activity outside the normal business activities of the company and is not recurrent in nature. It is appropriate to recognise the one-off nature of such expenses in undertaking the allocation for the purposes of this standard.\n\nThe principles described in this section are equally applicable to the circumstances of allocation of the actual expenses and the expected expenses of the company.\n\nIn respect of Life Investment Contracts, Acquisition Expenses will need to be further split between those that may be deferred in accordance with relevant accounting standards, and those that are to be treated as overheads. However, for the purposes of the Solvency Standard, the Capital Adequacy Standard and the Management Capital Standard, Acquisition Expenses in respect of Life Investment Contracts as determined by this expense allocation are to include acquisition overheads.\n\n13.1 Expenses for each Related Product Group are to be allocated to the following Expense Categories:\n\n1.  Acquisition Expenses;\n2.  Maintenance Expenses;\n3.  Investment Expenses; and\n4.  One-Off Expenses.\n\n13.2 Each Expense Category must include all relevant expenses whether direct or indirect and in aggregate the Expense Categories must include the total expenses of the company (including acquisition overheads in respect of Life Investment Contracts) other than one-off expenses determined in accordance with paragraph 13.10. Total expenses for this purpose are total operating expenses as disclosed in the financial statements.\n\n13.3 Each Related Product Group must include all relevant expenses whether direct or indirect and in aggregate the Related Product Groups must include the total expenses of the company. It is considered appropriate for this purpose to treat the shareholders’ retained profits and capital as if it were a notional Related Product Group.\n\n13.4 To the extent that an expense is directly attributable to a particular Expense Category or a particular Related Product Group, it must be so allocated.\n\n13.5 It is recognised that there are circumstances where arrangements (internal or external) provide for the limitation of the expenses borne by a particular product group. Such arrangements, to the extent substantiated as bona fide by the Actuary, may be reflected in the final allocation of expenses provided transparency of the allocation process is retained.\n\n13.6 An expense which is not directly attributable to a particular Expense Category or Related Product Group must be appropriately allocated. That allocation must reflect:\n\n1.  the Functional Activities to which the expense relates; and\n2.  an appropriate relationship between those Functional Activities and both the Expense Categories and the Related Product Groups.\n\n13.7 In undertaking the allocation described in paragraph 13.6 regard must be had for a diligent assessment of:\n\n1.  the purpose of the company in incurring a particular expense; and\n2.  the contribution of that expense to the business of the company;\n\nwhile retaining the integrity of the principles of section 3 of this Standard.\n\n  \nApportionment Process\n\n13.8 Processes of apportionment will be required, to a greater or lesser extent, in undertaking the allocation of expenses. These processes must be based on recent analyses of the operations of the life business and the identification of appropriate Expense Drivers and related expense apportionment ratios.\n\n13.9 Service Agreements\n\n13.9.1 Where activities of the company are being provided externally, through a service agreement or other contractual arrangement, the allocation of the company’s expenses relating to those activities must be reasonably consistent with the principles of this section. Where the service company fees are unreasonable as a basis for the allocation, the Actuary must determine an alternative allocation applying the principles of this section on a ‘look through’ basis.\n\n13.9.2 The information required to undertake this allocation should be sought from the service provider. Where practical difficulties arise in accessing the required information other methods, such as reference to appropriate industry benchmarks, may be employed.\n\n13.10 One-Off Expenses\n\n13.10.1 It is appropriate, in the context of expense allocation undertaken for the purposes of this Standard, to recognise one-off expenses. To achieve such recognition an expense must be, of itself:\n\n1.  material in accordance with the provisions of section 14; and\n2.  not incurred as part of the normal ongoing operations of the company; and\n3.  not regularly recurring in nature.\n\n13.10.2 One-off expenses, while allocated to Expense Categories for financial reporting purposes, need not be explicitly allocated (to Expense Categories or Related Product Groups) for the purposes of this Standard.\n\n13.11 Friendly Societies\n\n13.11.1 For expense allocation purposes a friendly society is to be regarded as two separate companies, namely:\n\n1.  the Management Fund in isolation; and\n2.  the sum of all the Benefit Funds.\n\n13.11.2 All the expenses of the society are to be allocated to the Management Fund, except in certain cases when some direct costs are allocated to a Benefit Fund where that Benefit Fund rules allow this.\n\n13.11.3 The expenses of the Benefit Funds (other than certain direct costs) are represented by the fees payable to the Management Fund under the Benefit Fund rules. For the purpose of allocating those expenses to the relevant Expense Categories in accordance with paragraph 13.1, the provisions under paragraph 13.9 in relation to Service Agreements are applicable.\n\n13.11.4 Where an allocation of the expenses of the Management Fund relating to life insurance activities into Expense Categories is not undertaken, acquisition expenses must be taken as 50% of the total expenses related to the life insurance business.\n\n## SECTION 14 Materiality\n\nOverview\n\nParticular values or components are considered material to the overall result of a calculation when their mis-statement or omission would cause that result to be misleading to the users of the information.\n\nMateriality tests assess the significance of the particular value/component by relating it to the amount of the overall result to which it contributes.\n\n14.1 The Policy Liability determined in accordance with this standard is subject to materiality standards applied at a statutory fund level.\n\n14.2 The base amount for materiality purposes is:\n\n1.  in respect of components of the profit and loss statement, the operating profit; and\n2.  in respect of components of the regulatory balance sheet, the difference between the assets of the statutory fund and the sum of the Policy Liabilities and Other Liabilities of that fund.\n\n14.3 While materiality must be applied at the statutory fund level, so that appropriate values are placed on the policy liabilities of each fund, the materiality of the statutory fund relative to the size of the company overall may be taken into account.\n\n14.4 While assessing materiality will always be a matter of professional judgement, the following quantitative thresholds are generally to be used:\n\n1.  variations in amounts of 10% or more of the base amount may be presumed material; and\n2.  variations in amounts of 5% or less of the base amount may be presumed immaterial.\n\n## SECTION 15 Initial Calculation of Policy Liability\n\nOverview\n\nWhen Policy Liabilities are first calculated in accordance with the latest version of this Standard, the calculation of Profit Margins and/or Acquisition Expense Recovery Components for in force business should have regard to the history of that business. Best Estimate Bonuses should be determined consistently.\n\nAlternative approaches may be appropriate, and the choice of approach will be a matter for professional actuarial judgement. In making that judgement consideration should be given to :\n\n the available data; and\n\n the type of benefit; and\n\n the duration the business has been in force; and\n\n materiality.\n\n15.1 In first applying the latest version of this Standard to in force Related Product Groups, the Actuary must seek to determine a reasonable estimate of the position, at the beginning of the reporting period, that would have existed had the latest version of this Standard been applied since Commencement.\n\n15.2 Where the valuation of policy liabilities in respect of Life Insurance Contracts, and reporting of profit, has previously been undertaken on a basis consistent with the principles of a then current version of the Valuation Standard it may be appropriate that those previous calculations be acknowledged as satisfying the principles of this section, provided that:\n\n1.  the Value of Future Best Estimate Bonuses and Shareholder Profits that would be determined under this standard exceeds the Adequacy Threshold; and\n2.  the result is not considered to be materially different from that which would arise under a strict application of paragraph 15.1.\n\n## SECTION 16 Statement Relating to the Valuation\n\nOverview\n\nIn order to provide transparency of the company’s financial statements, it is required that full disclosure be made by the Actuary in respect of the processes employed in accordance with this Standard.\n\nRegard must be had for the disclosure requirements prescribed in the standards of the Australian Accounting Standard Board that are relevant to life insurance business (in particular AASB 1038) and the relevant requirements of APRA through Prudential Rules under the Life Act.\n\nFinancial Statements\n\n16.1 At each reporting date the Actuary must provide for inclusion in the regulatory financial statements a summary of the significant elements of the calculation processes and significant assumptions used in deriving the results.\n\nFinancial Condition Report\n\n16.2 As at each reporting date the Actuary must provide in the investigation report required by section 113 or 115 of the Act, details of the calculation processes and the assumptions used in deriving the results.","sortOrder":13},{"sectionNumber":"no Discretionary Entitlement to Share in","sectionType":"part","heading":"no Discretionary Entitlement to Share in the","content":"DECEMBER 2005\n\nActuarial Standard 1.04\n\nVALUATION OF POLICY LIABILITIES\n\n![](image.003.png)Life Insurance\n\nActuarial Standards Board\n\n  \nTABLE OF CONTENTS\n\nPage\n\n[INTRODUCTION](#_Toc121212531)\n\n[The Standard](#_Toc121212532)\n\n[Application of the Valuation Standard](#_Toc121212533)\n\n[PART A – CONTRACT CLASSIFICATION AND POLICY LIABILITIES IN RESPECT OF LIFE INVESTMENT CONTRACTS](#_Toc121212535)\n\n[SECTION 1 Contract Classification and Application](#_Toc121212536)\n\n[SECTION 2 Policy Liabilities in Respect of Life Investment Contracts](#_Toc121212537)\n\n[PART B – PRINCIPLES FOR DETERMINING POLICY LIABILITIES IN RESPECT OF LIFE INSURANCE CONTRACTS](#_Toc121212538)\n\n[SECTION 3 The Principles of the Valuation](#_Toc121212539)\n\n[SECTION 4 The Valuation of Policy Liabilities](#_Toc121212540)\n\n[SECTION 5 The Best Estimate Liability](#_Toc121212541)\n\n[SECTION 6 Profit Carriers and Profit Margins](#_Toc121212542)\n\n[SECTION 7 Acquisition Expenses](#_Toc121212543)\n\n[PART C – METHODOLOGIES FOR DETERMINING POLICY LIABILITIES IN RESPECT OF LIFE INSURANCE CONTRACTS](#_Toc121212544)\n\n[SECTION 8 New Business - Calculation of Profit Margins and Acquisition Expense Recovery Components](#_Toc121212545)\n\n[SECTION 9 Reporting Date Recalculations - Benefits Providing no Discretionary Entitlement to Share in the Investment Experience of Assets Backing them.](#_Toc121212546)\n\n[SECTION 10 Reporting Date Recalculations - Benefits Providing a Discretionary Entitlement to Share in the Investment Experience of Assets Backing them.](#_Toc121212547)\n\n[SECTION 11 Loss Recognition](#_Toc121212548)\n\n[SECTION 12 Reinsurance](#_Toc121212549)\n\n[PART D – GENERAL REQUIREMENTS FOR ALL FORMS OF POLICY AND ACTUARY’S STATEMENT](#_Toc121212550)\n\n[SECTION 13 Allocation of Expenses](#_Toc121212551)\n\n[SECTION 14 Materiality](#_Toc121212552)\n\n[SECTION 15 Initial Calculation of Policy Liability](#_Toc121212553)\n\n[SECTION 16 Statement Relating to the Valuation](#_Toc121212554)\n\n  \nINTRODUCTION\n\nThe Standard\n\nThe actuarial standard for the valuation of policy liabilities is established under the Life Insurance Act 1995 (the Act), and is an integral component of the financial reporting regime for life insurance companies implemented under that Act.\n\nA valuation of the policy liabilities of a company is performed at least once a year as part of the regulatory reporting of the company. The value of the policy liabilities appears in the regulatory financial statements in the balance sheet of the company. The increase (or decrease) in policy liabilities of the company over the financial year contributes directly to the operating profit.\n\nImportant in the development of an integrated financial framework for the life industry were considerations of:\n\n methodologies for determining the policy liabilities of the life company in respect of Life Insurance Contracts which are consistent with objectives of realistic profit reporting;\n\n proper and timely release of profit arising in respect of Life Insurance Contracts over the life of the business;\n\n in respect of Life Investment Contracts, measurement of policy liabilities that follows the requirements of relevant accounting standards (to the extent that the financial reporting of Life Investment Contracts under such standards is appropriate for the purposes of the Act);\n\n requirements for disclosure of this information in a transparent and comparable format; and\n\n approaches to prescribing minimum capital requirements to support those liabilities and provide an indicator of the financial position of the company.\n\nThe actuarial standard for the valuation of policy liabilities addresses the first three of these issues, with a concern for the objectives of disclosure and reporting. The issue of capital requirements is addressed by separate actuarial standards - the Solvency Standard, the Capital Adequacy Standard and the Management Capital Standard.\n\nAccordingly, this actuarial standard prescribes:\n\n-   in respect of Life Investment Contracts, that the valuation of policy liabilities is to generally comply with the requirements of the relevant accounting standards, and\n-   in respect of Life Insurance Contracts, a set of principles, and in accordance with these principles an actuarial methodology, for the valuation of the policy liabilities of the life company.\n\n#### Application to Friendly Societies\n\nThe Act was amended in 1999 to extend its application to friendly societies that undertake life insurance business. However, previous versions of this standard were only applicable to life companies (registered under the Act) other than friendly societies. A separate standard applied to friendly societies.\n\nFor reporting periods commencing on or before 31 December 2004 friendly societies were exempted from the general purpose financial reporting standards applying to life companies by virtue of ASIC Class Order 99/1225. That class order was rescinded with effect for reporting periods commencing on or after 1 January 2005. It is therefore appropriate that regulatory financial reporting requirements be similarly aligned with effect from the application date of this revised standard and that this Standard applies to Friendly Societies.\n\nWith the rescinding of the ASIC class order, it is appropriate, for the purposes of applying the Valuation Standard, for benefits provided in benefit funds where there is a provision for distribution of unallocated surpluses to policy owners to be valued as if they were participating. Benefits provided under benefit funds where is no provision for distribution of unallocated surpluses to policy owners are to be valued as if they were non-participating.\n\n## Application of the Valuation Standard\n\nThe Valuation Standard is made for the purposes of section 114 of the Life Insurance Act 1995.\n\nIt applies:\n\n1.  in respect of all life insurance business (including life insurance business carried on outside Australia) of a registered life company (including a life company which is a friendly society); and\n2.  in respect of the life insurance business of an eligible foreign life insurance company, other than life insurance business carried on outside Australia; and\n3.  to a valuation of the policy liabilities of the company made for the purposes of the Act; and\n4.  for all valuations made in respect of periods ending on or after 31 December 2005 in the case of life insurance companies (other than friendly societies) and on or after 31 May 2006 in the case of friendly societies.\n\nExcept for paragraph 1.5, it will continue to apply until replaced. Unless the Valuation Standard is replaced at an earlier date, paragraph 1.5 will cease to apply to valuations made in respect of reporting periods ending on or after 31 December 2009.\n\nThe Standard is written in the context of Australian legislation and bases of taxation. Appropriate adjustment should be made, for example to allow for different bases of taxation, where this Standard is being applied to overseas business.\n\n#   \nPART A – CONTRACT CLASSIFICATION AND POLICY LIABILITIES IN RESPECT OF LIFE INVESTMENT CONTRACTS\n\nFor the purposes of this Standard and reporting under the Act, policy liabilities in respect of life investment contracts are to be determined in accordance with the relevant accounting standards, subject to any available options being restricted to the fair value based options.\n\n## SECTION 1 Contract Classification and Application\n\nAPRA’s Prudential Rule 49 clarifies the basis on which policies written by life insurers are to be classified for the purpose of regulatory financial reporting. In particular it distinguishes between those policies issued by life companies that meet the definition of a Life Insurance Contract for regulatory reporting purposes and those that do not (referred to as “Life Investment Contracts”).\n\nPrudential Rule 49 also identifies key components of policies written by life companies and stipulates the circumstances in which such components must be unbundled for regulatory reporting purposes.\n\n1.1 For the purposes of this standard, an unbundled component of a policy is to be treated as if it were a stand-alone policy. After allowing for unbundling, Life Insurance Contracts (including contracts with Discretionary Participation Features) and any associated Life Investment Contracts must be dealt with in separate Related Product Groups.\n\n1.2 After allowing for any unbundling, the Policy Liability in respect of a Life Insurance Contract (including a contract with Discretionary Participation Features) must be determined in accordance with the requirements of Parts B and C of this standard.\n\n1.3 After allowing for any unbundling, the Policy Liability in respect of a Life Investment Contract must be determined in accordance with Section 2 of Part A of this standard.\n\n1.4 Section 2 of Part A of this standard is not to be used for the purposes of calculating the Solvency Liability under the Solvency Standard or the Capital Adequacy Liability under the Capital Adequacy Standard. For those purposes, the prospective valuation methodology outlined in Parts B and C of this standard will apply to all elements of the life insurance business issued by the company, regardless of how it is classified, albeit using assumptions as specified in the Solvency Standard or the Capital Adequacy Standard.\n\n1.5 Where the Actuary determines, and can demonstrate to the satisfaction of APRA, that the calculation of the Policy Liability in accordance with paragraph 2.1 would reduce the retained profits of the statutory fund to such an extent that it would unreasonably hinder the distribution of surplus assets from that fund, then, for policies that were in force at 31 December 2005, the Policy Liability may, with APRA’s agreement, be determined in accordance with the requirements of Parts B and C of this standard.\n\n1.6 Part D of this standard applies to all of the life insurance business issued by the company for the purposes of the Act.\n\n## SECTION 2 Policy Liabilities in Respect of Life Investment Contracts\n\nLife Investment Contracts consist of at least one Financial Instrument, being the element that gives rise to a financial asset or financial liability. They may also contain additional elements in respect of management services, embedded derivatives or participation features.\n\nThe net contractual obligations under a Life Investment Contract which arise under the Financial Instrument Element of the contract (and any associated management services that are not unbundled) is referred to as the Life Investment Contract Liability, consistent with the terminology adopted under AASB 1038.\n\nLife Investment Contracts with Discretionary Participation Features that are regulated under the Life Insurance Act 1995, are treated in their entirety as if they were Life Insurance Contracts and so are not subject to this section of the standard. They may, however, still be subject to certain minimums or disclosures the quantification of which is subject to this section of the standard.\n\nEmbedded derivatives within a Life Investment Contract are financial instruments and must be allowed for within the Financial Instrument Element for the purpose of this Valuation Standard.\n\nPolicy Liability of a Life Investment Contract\n\n2.1 The Policy Liability in respect of a Life Investment Contract is determined as\n\nPolicy Liability = LICL + MSE\n\nwhere\n\nLICL = the Life Investment Contract Liability, being the liability arising in respect of the Financial Instrument Element\n\nMSE = the net liability (asset) in respect of the Management Services Element.\n\nLife Investment Contract Liability\n\n2.2 The Life Investment Contract Liability, being the component of the Policy Liability that arises under a Life Investment Contract issued by an Australian life insurance company that relates to the Financial Instrument Element (and any associated management services that are not unbundled), is to be determined in accordance with the fair value through profit and loss provisions of the relevant accounting standards (whether or not the Financial Instrument Element is measured on that basis in the general purpose financial statements).\n\nManagement Services Element\n\n2.3 The Policy Liability that arises under a Life Investment Contract is to include the net amount of all liabilities and assets arising in respect of the Management Services Element of the contract. These liabilities or assets include, but need not be limited to, the value of Deferred Fee Revenue and Deferred Acquisition Costs. The measurement of these liabilities and assets is to be in accordance with the relevant accounting standards.\n\nReinsurance of Life Investment Contracts\n\n2.4 The Policy Liability is determined gross of reinsurance (as defined for the purposes of the Act). The recognition and measurement of outwards reinsurance that does not involve the transfer of Insurance Risk are to be undertaken separately in accordance with the fair value through profit and loss provisions of the relevant accounting standards (whether or not they are reported on that basis in general purpose financial statements).\n\n# PART B – PRINCIPLES FOR DETERMINING POLICY LIABILITIES IN RESPECT OF LIFE INSURANCE CONTRACTS\n\n## SECTION 3 The Principles of the Valuation\n\nOverview\n\nThe purpose of this part of the standard in prescribing a set of principles for the valuation of the policy liabilities in respect of life insurance contracts is to achieve the two essential objectives of:\n\n determining, as at the reporting date, a realistic determination of the policy liabilities of the company in respect of Life Insurance Contracts; and\n\n providing for the emergence of profit in respect of Life Insurance Contracts as it is earned.\n\nThe Best Estimate Liability\n\nThe first of these objectives may be met by determining a best estimate value of the liabilities being the value of the expected future contractual payments to policy owners on the basis of best estimates of future income and outgo.\n\nThe Profits\n\nThe second of these objectives may be met by determining a best estimate value of the expected future profits to emerge under the policies. The explicit provision for future profits, through Bonuses and/or Profit Margins, is a mechanism to facilitate the release of profit as it is earned through the provision of services and the receipt of the related income.\n\nThe sum of the Best Estimate Liability and the value of the expected future profits is called the Policy Liability.\n\nIt is not the purpose of this Standard to prescribe a single methodology for the valuation of policy liabilities in respect of Life Insurance Contracts. The principles of the Standard will normally be achieved by adopting a projection methodology. However, it is recognised that alternative approaches - such as an accumulation methodology - may in some cases be appropriate in achieving the principles.\n\n  \n\n3.1 It is the principles which are paramount in determining the Policy Liability; methodology is incidental to the principles. Projection or accumulation methodologies may be appropriate provided the Actuary can demonstrate that the principles have been met.\n\n3.2 The Policy Liability must provide for both:\n\n1.  a best estimate value of the liability of the company in respect of obligations under Life Insurance Contracts; and\n2.  a uniform emergence of profit in respect of Life Insurance Contracts relative to one or more appropriate Profit Carriers.\n\n3.3 While Profit Carriers are an explicit component of the valuation where a projection approach is used, the Profit Carriers are implicit where an accumulation approach is appropriately used.\n\n3.4 The profit emerging in the reporting period must recognise both:\n\n1.  the expected profits for the period; and\n2.  the Experience Profit for the period.\n\n3.5 The valuation method must provide for the emergence of profit when it is earned. The emergence of earned profit must not be deferred; nor must unearned profit be prematurely recognised.\n\n3.6 Profits are earned on the later of:\n\n1.  the provision of a service to the policy owner; and\n2.  the receipt (or recognition) of income relating to that service.\n\n3.7 When the valuation results in expected future profits for a Related Product Group that are below the Adequacy Threshold for that product group, the value of the shortfall must be recognised immediately as a loss.\n\n3.8 Subject to circumstances covered by paragraph 3.7, profit for the period must not otherwise be affected by a change in the Best Estimate Assumptions in respect of future periods, except that:\n\n1.  where previously recognised losses exist for a Related Product Group and that change in Best Estimate Assumptions results in expected future profits emerging, the present value of those profits must be released to the extent necessary to offset those previously recognised losses; or\n\n1.  where that change is in the Best Estimate Assumption for the discount rate (and future investment earnings and related economic assumptions, where relevant) due to market changes only, and the benefit has no discretionary entitlement to share in investment experience, the present value of the expected future profits which are generated by the change must be released.\n\nWhere the change in Best Estimate Assumptions would result in a release of expected future profits otherwise than as above, the present value of those profits must not be released, but respread to emerge as a uniform proportion of the appropriate Profit Carrier(s).\n\n3.9 In determining the Best Estimate Liability and Best Estimate Assumptions, the Actuary must have regard to the impact on the liability of the distribution of potential future outcomes. Where the benefits being valued contain options that may potentially be exercised against the company, or the potential liability outcomes have an adverse asymmetrical distribution, then the Best Estimate Liability must include an appropriate value in respect of those options and/or asymmetries.\n\n3.10 Approximate methods may be used in determining the Policy Liability of the company where the result so produced is not material or not materially different from that which would result from a full valuation process. In particular, the special circumstances of Reinsurers are recognised as warranting approximate methods.\n\n## SECTION 4 The Valuation of Policy Liabilities\n\nOverview\n\nBenefits for life companies other than friendly societies are either Participating Benefits or Non-Participating Benefits. Due to the different nature of these benefits, different approaches are required to the valuation of policy liabilities.\n\nParticipating Benefits\n\nWhere Participating Benefits are provided the policy owner is entitled to share in the profits of the business.\n\nThe participation process is managed by the life company, through the declaration of Bonuses. Company practice, and ultimately the requirements of the Act, control the relationship between policy owner and shareholder entitlements to profits.\n\nThe profit for Participating Benefits includes provision for:\n\n Bonuses (policy owner profits); and\n\n Shareholder Profits.\n\n  \nPolicy Liability \\=\n\nBest Estimate Liability\n\nplus Value of future Best Estimate Bonuses\n\nplus Value of future Best Estimate\n\nShareholder Profits\n\nNon-Participating Benefits\n\nWhere Non-Participating Benefits are provided, profit is entirely the entitlement of the shareholder.\n\nPolicy Liability =\n\nBest Estimate Liability\n\nplus Value of future Best Estimate Shareholder Profits\n\nThe contractual arrangements in respect of the Non-Participating Benefits may entitle the policy owner to additions to the benefit, at the discretion of the company, reflecting the investment experience of the assets backing the benefit. While this is not a distribution of profit, the determination of the additions may involve similar management processes to the distribution of bonus for Participating Benefits. Accordingly, similar valuation methods may be appropriate.\n\nFriendly Society Benefits\n\nFriendly society benefits are neither participating nor non-participating.\n\nFor the purpose of applying the Valuation Standard, benefits provided under benefit funds where there is a provision for distribution of unallocated surpluses to policy owners are to be valued as if they were participating. Benefits provided under benefit funds where is no provision for distribution of unallocated surpluses to policy owners are to be valued as if they were non-participating.\n\n4.1 Participating Benefits\n\n4.1.1 In respect of Participating Benefits, profit must include the policy owners’ share of profits. The valuation of the policy liabilities must, therefore, make allowance for the best estimate at the reporting date of:\n\n1.  the value of expected future Policy Owner Profit Share; and\n2.  the value of expected future Shareholder Profit Share.\n\n4.1.2 Declarations of Bonus are an appropriation of profit for participating business. Accordingly, current year Best Estimate Bonuses are excluded from the Policy Liability, allowing the emergence of this amount as Operating Profit in the period.\n\n4.1.3 The relationship between the assumed allocation of profit to policy owners and shareholders respectively must, in respect of each future year, be consistent with:\n\n1.  the policy conditions; and\n2.  the company’s practice or stated philosophy.\n\n4.2 Non-Participating Benefits\n\n4.2.1 In respect of Non-Participating Benefits, the valuation of policy liabilities must make allowance for the best estimate at the reporting date of the value of expected future Shareholder Profit Share.\n\n4.2.2 Where a Non-Participating Benefit includes an entitlement, at the discretion of the company, to share in the investment experience of the assets backing the benefits, the valuation of the policy liabilities must make allowance for the best estimate at the reporting date of the present value of current year and expected future Discretionary Additions.\n\nConsistency with Asset Values\n\n4.3 Where the basis of asset valuation used for the regulatory financial statements is not consistent with the basis of asset valuation implicit in the valuation of the liabilities, the Actuary must make appropriate adjustments to the Policy Liability.\n\nReinsurance of Life Insurance Contracts\n\n4.4 The Policy Liability is determined gross of reinsurance (as defined for the purposes of the Act), although the gross Policy Liability may be calculated by first determining the necessary components on a net of reinsurance basis and then adjusting the result by the amounts of the corresponding components of the Reinsured Policy Liability.\n\n  \n\n## SECTION 5 The Best Estimate Liability\n\nOverview\n\nThe Best Estimate Liability is determined as the value of the expected future payments and receipts under the policy, gross of reinsurance, based on obligations at the reporting date.\n\nBest Estimate Liability =\n\nValue of expected future benefit payments\n\nplus Value of expected future expenses\n\nless Value of expected future receipts\n\nNote that the benefit obligations projected include all contractual benefits. In particular, in the case of Participating Benefits they include Bonuses declared prior to (but not on, or after) the date of valuation.\n\nIn projecting the expected future cash flows, the Actuary makes assumptions about the expected future experience, taking into account all factors which are considered to be material to the calculation, including:\n\n investment earnings\n\n inflation\n\n taxation\n\n expenses\n\n mortality and morbidity\n\n policy discontinuance.\n\nThe Actuary’s assumptions must reflect a best estimate of the likely experience.\n\n5.1 In accordance with the principles of section 3, where the valuation of the policy liabilities involves assumptions as to future experience, the assumptions used must be Best Estimate Assumptions.\n\n5.2 In establishing Best Estimate Assumptions, due regard must be had for the materiality of:\n\n1.  the benefits being considered; and\n2.  the effect of particular assumptions on the determined result.\n\n  \n\n5.3 Valuing Liability Options\n\n5.3.1 The Best Estimate Liability and Best Estimate Assumptions are to have regard to any options or asymmetrical distribution of liability outcomes.\n\n5.3.2 Where the distribution of potential liability outcomes is equally likely to result in a gain or loss, then it will normally be sufficient to adopt the mean of the assessed distributions of future experience for the Best Estimate Assumptions and calculate the Best Estimate Liability accordingly.\n\n5.3.3 However, the Actuary needs to consider and assess the extent that variations in the assumptions may be correlated, and/or may compound one another, in adverse circumstances. In such cases the Best Estimate Assumptions must be adjusted so that the Best Estimate Liability is representative of the mean of the distribution of the potential liability outcomes.\n\n5.3.4 Where the benefits contain options that may be exercised against the company, then either the value of those options must be determined (via a suitable option pricing method) and added to the Best Estimate Liability, or the Best Estimate Assumptions adjusted so as to appropriately capture the value of the options as part of the Best Estimate Liability.\n\n5.3.5 The requirements throughout this standard in respect of Best Estimate Assumptions and Best Estimate Liabilities are to be interpreted in this context.\n\nInvestment Earnings\n\n5.4 Where the cash flows to be valued depend on future investment earnings, the Best Estimate Assumption for investment earnings must reflect the expected investment earnings applicable to the actual assets on which the cash flows depend.\n\n5.5 The Discount Rate\n\n5.5.1 The gross rate used to discount expected future cash flows must, to the extent the benefits under the policy are contractually linked to the performance of the assets held, reflect the expected investment earnings applicable to the assets backing the benefit being valued. Otherwise, a Risk Free Discount Rate is to be used.\n\n5.5.2 This does not preclude the use of discount rates that make allowance for assumptions that are expressed as a percentage of the value of assets, rather than allowing for those assumptions explicitly in the projection. This practice may apply in respect of certain expenses, taxes or profit margins.\n\n5.6 Taxation\n\n5.6.1 For business where tax is based only on profits, liabilities may be determined gross of tax. Otherwise, appropriate allowance must be made for the effect of taxation.\n\n5.6.2 Where allowance for tax on investment earnings is required, it must be made in accordance with Best Estimate Assumptions, but based on an asset profile which would be expected to yield a return equal to the discount rate assumption in paragraph 5.5.1.\n\n5.7 Servicing Expenses\n\n5.7.1 The Best Estimate Assumption for Maintenance Expenses must be sufficient to cover the expected maintenance cost of servicing each policy, in respect of in force business, in the year following the reporting date. The expected maintenance cost of servicing each policy is the expected Maintenance Expenses appropriately adjusted for one-off expenses.\n\n5.7.2 The Best Estimate Assumption for Investment Management Expenses must be sufficient to cover the cost of managing an asset profile which would be expected to yield a return equal to the discount rate assumption in paragraph 5.5.1.\n\n5.7.3 Where Servicing Expense assumptions are expressed in monetary amounts, the assumptions beyond the coming year must be adjusted in line with best estimate inflation assumptions.\n\nAcquisition Expenses\n\n5.8 The Best Estimate Assumption for Acquisition Expenses at Commencement must be the greater of:\n\n1.  Establishment Fees received at Commencement; and\n2.  actual Acquisition Expenses incurred, less expenses which the Actuary considers to be ‘one-off’ in nature.\n\nBoth must be consistently adjusted for tax in accordance with paragraph 5.6.\n\n  \n\nOther Assumptions\n\n5.9 The Best Estimate Assumption in respect of all other assumptions used in the valuation of policy liabilities, must be assumptions about future experience which:\n\n1.  are made using professional judgement, training and experience; and\n2.  are made having regard to reasonably available statistics and other information; and\n3.  are neither deliberately overstated nor deliberately understated.\n\n## SECTION 6 Profit Carriers and Profit Margins\n\nOverview\n\nPolicies are written with the expectation of producing profits. Profit Carriers are selected and Profit Margins determined when a policy commences to enable the appropriate emergence of the expected shareholder profit over the term of the benefits. (Policy owner profit emerges through Bonuses.) This is achieved as follows:\n\nProfit Margin =\n\nValue of future Best Estimate Shareholder Profits\n\ndivided by Value of Profit Carrier(s)\n\nwhere the Profit Carrier is a financially measurable indicator of either:\n\n the expected cost of the services provided to the policy owner; or\n\n the expected income item relating to the services.\n\nThe range of services which may be provided to the policy owner, includes:\n\n insurance of mortality, morbidity (or similar risks)\n\n generation of investment income\n\n setting up the policy (selling or acquisition)\n\n ongoing administration\n\n investment management\n\n provision of bonuses\n\nSelection of the profit carrier is critical in determining the magnitude and timing with which profits are released.\n\n  \n\n6.1 Profit Margins\n\n6.1.1 In accordance with the principles of section 3, the appropriate release of expected future shareholder profits is provided for in valuing the policy liabilities, either explicitly or implicitly, through the incorporation of Profit Margins.\n\n6.1.2 A Profit Margin must be expressed, explicitly or implicitly, as a uniform proportion of one or more appropriate Profit Carrier(s).\n\n6.2 Profit Carriers\n\n6.2.1 The appropriate Profit Carrier(s) must be related to the services provided to policy owners by the company. The Actuary, in selecting the appropriate Profit Carrier(s), must consider:\n\n1.  the services and income items applicable to the benefit; and\n2.  the relative risks of services, or of costs, to the company; and\n3.  the relative timing of the provision of the services and the receipt or recognition of income for those services.\n\n6.2.2 Provision of capital to meet Solvency and Capital Adequacy Requirements is not a service for this purpose.\n\n6.2.3 Acquisition is a service for this purpose only when explicit Establishment Fees are received.\n\n6.2.4 The practical implications of selecting multiple profit carriers should be considered relative to the materiality of the results. Where multiple Profit Carriers are used, for ease of computation it may be desirable to retain a constant Profit Margin for all but one of the Profit Carriers selected, allowing the Profit Margin in respect of that remaining Profit Carrier to be the only variable.\n\n6.2.5 Profit Carrier(s), once chosen, must be used consistently for a Related Product Group unless in the Actuary's judgement the Profit Carrier(s) are no longer appropriate.\n\n6.2.6 Where Profit Carrier(s) are changed this must not result in a release of profit at the date of change. This is achieved by equating the values of Best Estimate Shareholder Profits before and after the change in determining the new Profit Margins.\n\n  \n\n## SECTION 7 Acquisition Expenses\n\nOverview\n\nA company normally incurs Acquisition Expenses and possibly receives Establishment Fees when it acquires new business.\n\nWhere new business is written with the expectation of producing profits, then, if the Establishment Fees are less than the actual Acquisition Expenses, there will be an expectation of receiving future income, part of which goes to meeting the unrecouped Acquisition Expenses.\n\nThe principles for the allocation of expenses to Acquisition Expenses are set out in section 13. Acquisition Expenses are defined in terms of the activities related to the acquiring of new business. The acquisition of new business can generally be considered to include activities of the company such as product marketing, sales, underwriting and administration, undertaken prior to and at the point of issuing the policy and establishing it in the policy records of the company.\n\nThe new business expected to derive from a particular expense may not necessarily be acquired in the same period in which the expense occurs. The new business must, however, be expected to arise as a result of that expenditure. To the extent the expenditure has only a tenuous link with the acquisition of new business - for example, general growth and development expenses – it is not considered to be an acquisition expense.\n\n  \n\n7.1 To the extent that Acquisition Expenses are not recovered by the Establishment Fees, they must be charged against expected future profits, provided that these profits are sufficient to recover them. Any Acquisition Expenses which cannot be recovered from Establishment Fees or expected future profit will emerge as a loss at issue.\n\n7.2 Appropriate allowance must be made in this process for tax on both Establishment Fees and Acquisition Expenses.\n\n7.3 Where expected future profits for a Related Product Group are insufficient to recover unrecouped Acquisition Expenses, the loss must be recognised in accordance with the processes of section 11.\n\n7.4 Where a projection approach is used to calculate the Policy Liability, the expected income which is used to recover Acquisition Expenses is incorporated as a reduction in the Best Estimate Liability calculation. Accordingly, Acquisition Expense Recovery Components are an implicit component of the valuation.\n\n7.5 Where an accumulation approach is used to calculate the Policy Liability the value of the unrecouped portion of Acquisition Expenses which is to be recovered from future income must be explicitly allowed for as a reduction in the liability by using Acquisition Expense Recovery Component(s).\n\n#   \nPART C – METHODOLOGIES FOR DETERMINING POLICY LIABILITIES IN RESPECT OF LIFE INSURANCE CONTRACTS\n\nOverview\n\nIf the Best Estimate Assumptions made at Commencement remain valid through the policy term, and if experience under the benefit exactly reflects those expectations, the methodologies should ensure that profit emerges at each reporting date as:\n\n investment earnings (net of tax) on any retained profits and shareholder capital; plus\n\n release of the expected profits (net of tax) in respect of the valuation period.\n\nIn reality, actual experience in the valuation period will likely differ from that expected, and to this extent there will emerge an experience profit (or loss).\n\nFurther, as experience changes, the Best Estimate Assumptions as to the future may change.\n\nThe principles of this standard require that the present value of profit resulting from a change in non-economic Best Estimate Assumptions of the Actuary, must not be released immediately at the reporting date, but rather must be released appropriately over the future life of the benefit.\n\nAppropriate profit emergence is achieved through a methodology which involves recalculation at each reporting date of the expected future profit. Profit Margins and Acquisition Expense Recovery Components are determined as required to ensure the appropriate release of those future profits.\n\nIn the case of benefits with an entitlement to share in the investment experience of the assets backing them, the methodology must deal specifically with investment experience profits to allow its release over the future life of the benefit as:\n\n in the case of Participating Benefits (including friendly society benefits under benefit funds where there is a provision for distribution of unallocated surpluses to policy owners), future Bonuses and Shareholder Profits; or\n\n in the case of Non-Participating Benefits, future Discretionary Additions.\n\nNote that in this Part, discussions of the detail of the methodologies for calculating policy liabilities will typically be in terms of a benefit. A policy may incorporate multiple benefits. Further, certain processes described in this Part may be performed at a Related Product Group level, which incorporates multiple (like) policies.\n\nWhile recalculation processes described in this Part will normally be considered for a Related Product Group, the Actuary may group benefits at a lower level where this is supported by company practice or stated philosophy and is done consistently over time.\n\n## SECTION 8 New Business - Calculation of Profit Margins and Acquisition Expense Recovery Components\n\n8.1 Profit Margins\n\n8.1.1 Where explicit Profit Margins are required, they are determined by dividing:\n\n1.  the value at Commencement of the expected future profits from the benefit; by\n2.  the value at that date of the appropriate Profit Carrier(s).\n\n8.1.2 The value at Commencement of expected future profits must be determined on the basis of Best Estimate Assumptions.\n\n8.1.3 The Best Estimate Assumptions, with the exception of the Acquisition Expense assumption, must be determined as at a single date, but that date may be:\n\n1.  the beginning of the reporting period; or\n2.  the date of commencement of the business; or\n3.  the end of the reporting period.\n\n8.1.4 The Acquisition Expense assumption will be determined at the end of the reporting period.\n\n8.2 Treatment of Losses\n\n8.2.1 If the projection reveals a value of expected future profit at Commencement for new business in a Related Product Group that is below the Adequacy Threshold, then that loss must either be recognised, or dealt with in accordance with the provisions of paragraph 8.2.2. Any losses at Commencement so recognised must be accumulated. If the Related Product Group subsequently generates profits above the Adequacy Threshold, the cumulative losses must be offset (see section 11).\n\n8.2.2 Alternatively, new business may be grouped with existing in force business for the same Related Product Group for the purpose of calculating Profit Margins. Where new business is so grouped, any losses at Commencement for that new business cannot be accumulated or subsequently offset.\n\n8.2.3 The approach used by the Actuary for treatment of losses on new business must be applied consistently over time.\n\n8.3 Acquisition Expense Recovery Components\n\n8.3.1 Where explicit Acquisition Expense Recovery Components are required, they are determined at Commencement by dividing:\n\n1.  the Best Estimate Assumption for Acquisition Expenses at Commencement (to the extent not recovered by Establishment Fees); by\n2.  the present value at that date of the appropriate Acquisition Expense Recovery Carrier(s).\n\n8.3.2 The Acquisition Expense Recovery Carrier(s) must reflect the element of the premium or other income item, including surrender penalties, designed or intended to recover Acquisition Expenses.\n\n8.3.3 Appropriate adjustment to Acquisition Expenses and Acquisition Expense Recovery Components will be needed where Acquisition Expenses are expected to be incurred in a year other than the year of issue. Any adjustment by the Actuary must have regard to Acquisition Expenses accrued or deferred in the accounts.\n\n## SECTION 9 Reporting Date Recalculations - Benefits Providing\n\n## no Discretionary Entitlement to Share in the\n\n## Investment Experience of Assets Backing them.\n\nOverview\n\nA change in the discount rate (and other related economic assumptions) at the reporting date may occur because of:\n\n changes in the market conditions; and/or\n\n other changes (such as a change in the mix of assets backing the benefits that are dependent on investment performance).\n\nThe recalculation process described in this section results in the Policy Liability reflecting the effect of changes in discount rates (and other related economic assumptions) due to market conditions only . The effect of other changes in discount rates or other assumptions is spread over the future benefit term, through the recalculation process.\n\nWhere the only change in the Best Estimate Assumptions is a change in the discount rates (and other related economic assumptions) due to a change in market conditions, the recalculation process will result in the Profit Margins and Acquisition Expense Recovery Components being unchanged.\n\n9.1 Recalculation of Profit Margins\n\n9.1.1 Where Profit Margins are determined at Commencement, the principles of section 3 require a recalculation of those Profit Margins at each subsequent reporting date to ensure that future expected profits are neither released prematurely nor deferred inappropriately.\n\n9.1.2 The methodology detailed below produces results in accordance with the principles of section 3. Other methods may be appropriate where the Actuary can demonstrate that the principles have been met.\n\n9.1.3 A recalculation of Profit Margins at the reporting date may be carried out as follows:\n\n1.  derive the value of expected future profits at the reporting date as:\n\nBest Estimate Liability (on Basis 1)\n\nplus Value of expected future profits (on Basis 1)\n\nless Best Estimate Liability (on Basis 2);\n\nand\n\n1.  recalculate the Profit Margins as:\n\nValue of expected future profits (from (a) )\n\ndivided by\n\nValue of the Profit Carrier(s) (on Basis 2).\n\nWhere\n\nBasis 1 uses the Best Estimate Assumptions and Profit Margins at the previous reporting date, except for the discount rate and related economic assumptions - see paragraph 9.2; and\n\nBasis 2 uses the Best Estimate Assumptions at the current reporting date.\n\n9.2 Discount Rate\n\n9.2.1 The discount rate (and related economic assumptions) used for calculations on Basis 1 is determined as that used at the previous reporting date adjusted only to the extent that there have been changes in market conditions.\n\n9.2.2 A consistent approach is to be used in respect of economic assumptions related to the discount rate; for example, the investment earnings and inflation assumptions.\n\n9.3 Recalculation of Acquisition Expense Recovery Components\n\n9.3.1 Where Acquisition Expense Recovery Components are determined at Commencement the principles of section 3 require a recalculation of those components at each subsequent reporting date to ensure that future expected profits are neither released prematurely nor deferred inappropriately.\n\n9.3.2 The methodology detailed below produces results in accordance with the principles of section 3. Other methods may be appropriate where the Actuary can demonstrate that the principles have been met.\n\n9.3.3 A recalculation of Acquisition Expense Recovery Components at the reporting date may be carried out as follows:\n\n1.  derive the value of the expected future acquisition expense recoveries at the reporting date as:\n\nAcquisition Expense Recovery Components\n\nmultiplied by\n\nValue of Acquisition Expense Recovery Carrier(s) (on Basis 1);\n\nand\n\n1.  recalculate the Acquisition Expense Recovery Components as:\n\nValue of the expected future acquisition expense recoveries (from (a))\n\ndivided by\n\nValue of Acquisition Expense Recovery Carrier(s)\n\n(on Basis 2).\n\n  \nWhere\n\nBasis 1 uses the Best Estimate Assumptions at the previous reporting date, except for the discount rate and related economic assumptions - see paragraph 9.2; and\n\nBasis 2 uses the Best Estimate Assumptions at the current reporting date.\n\n## SECTION 10 Reporting Date Recalculations - Benefits Providing a Discretionary Entitlement to Share in the Investment Experience of Assets Backing them.\n\nOverview\n\nThe recalculation methodology described in this section establishes how the Policy Liability changes and, hence, how profit emerges over the period for discretionary business. The objective of the methodology is to determine Operating Profit in accordance with the framework of the Act.\n\nFor a Participating Benefit (including a friendly society benefit under a benefit fund where there is a provision for distribution of unallocated surpluses to policy owners), two important aspects of this framework are;\n\n1.  The allocation of Operating Profit is a distinct process from the distribution of retained profits. It is the value of declared Bonuses and shareholder transfers out of the fund which are distributions of retained profits (inclusive of the Operating Profit allocated in the period)\n\nIt is the Operating Profit which is the amount allocated between policy owners retained profits (or unallocated surplus in the case of friendly societies) and shareholders retained profits.\n\n1.  Operating Profit includes shareholder profit and policy owner profit. It comprises:\n\n-   the value of current period Best Estimate Bonuses (including best estimate interim and terminal bonuses and the value of best estimate reversionary bonuses) and Best Estimate Shareholder Profits; and\n-   non-investment Experience Profit.\n\nFor Non-Participating Benefits which have an entitlement to discretionary additions, the approaches described in this section may be applied for recalculating Discretionary Additions and Profit Margins. The section is to be interpreted by substituting “discretionary addition” for “bonus”. It must be recognised that the “discretionary addition” is not a “bonus”, and consequently the cost of any “discretionary addition” in the current period forms part of the Policy Liability at the reporting date, while the cost of any “bonus” in the current period is an allocation and distribution of current period operating profit and does not form part of the Policy Liability at the reporting date.\n\nIt is noted that for Participating Benefits (but not Non-Participating Benefits which have an entitlement to discretionary additions), the recalculation methodology means a change in assumptions (predominantly non-investment assumptions) may affect current year profit, through changes in the rate of Best Estimate Bonus. In these specific circumstances, this result is considered appropriate and in compliance with the intent of the principles of section 3.\n\n10.1 Recalculation of Profit Margins\n\n10.1.1 Where Profit Margins are determined at Commencement, the principles of section 3 require a recalculation of those Profit Margins at each subsequent reporting date to ensure that future expected profits are neither released prematurely nor deferred inappropriately.\n\n10.1.2 The methodology detailed below is deemed to produce results in accordance with the principles of section 3. Other methods may be appropriate where the Actuary can demonstrate that the principles have been met.\n\n10.1.3 A recalculation of Profit Margins at the reporting date may be carried out as follows:\n\n1.  derive the value of expected future policy owner and shareholder profits at the reporting date as:\n\nValue of Supporting Assets\n\nless Best Estimate Liability (on Basis 2)\n\nless Value of current period Bonuses and Shareholder Profits (on Basis 2);\n\nand\n\n1.  recalculate the Profit Margins as:\n\nValue of expected future profits (from (a) )\n\nless Value of future Best Estimate Bonuses (on Basis 2)\n\ndivided by\n\nValue of the Profit Carrier(s) (on Basis 2).\n\nWhere\n\nValue of Supporting Assets is calculated according to paragraph 10.2;\n\nBasis 2 uses the Best Estimate Assumptions at the current reporting date;\n\nValue of current period Bonuses is determined as the cost of Bonus according to paragraph 10.3; and\n\nThe relationship between Bonuses and Shareholder Profits must be in accordance with paragraph 4.1.3.\n\n10.2 Value of Supporting Assets\n\n10.2.1 The Value of Supporting Assets is determined as:\n\n1.  the Policy Liability at the end of the previous reporting period; plus\n2.  the cost of declared Bonuses at the end of the previous period; plus\n3.  the actual policy related cash flows and investment experience as reported in the regulatory financial statements; less\n4.  the expected Shareholder Profits emerging over the period and the non-investment Experience Profit.\n\n10.2.2 The Value of Supporting Assets must be calculated so as to attribute no value of assets to terminated benefits.\n\n10.3 Cost of Bonus\n\n10.3.1 The cost of Bonus at the reporting date (whether best estimate or declared) must reflect the cash value to the policy owners of those Bonuses at the reporting date.\n\n10.3.2 Where Bonus at the reporting date does not acquire an immediate cash value, but rather value vests in the policy owner over some defined period of time, the Actuary, in determining the cost of Bonus, must allow an appropriate value for that unvested Bonus.\n\n  \n\n10.3.3 Terminal bonus is included in the calculation of cost of Bonus to the extent it is immediately vested in the policy owner and is guaranteed.\n\n## SECTION 11 Loss Recognition\n\nOverview\n\nWhere at a reporting date the value of future profits for a Related Product Group falls below the Adequacy Threshold for that Related Product Group, the resulting shortfall is not spread over the benefit term (as are expected future profits above the Adequacy Threshold) but is recognised as an immediate loss at that date. This is in accordance with the principles of section 3 and is achieved by setting the relevant Profit Margins to an amount such that the value of future profits is equal to the Adequacy Threshold at the reporting date. This process is carried out for each Related Product Group.\n\nA record of cumulative losses is kept for each Related Product Group. Before a Related Product Group can have a value of future profits in excess of the Adequacy Threshold, cumulative losses must have been offset. Once cumulative losses have been eliminated for the Related Product Group it will return to a position of adequate future profits.\n\n11.1 A record of the cumulative amount of losses recognised in accordance with the principles of section 3 must be maintained for each Related Product Group.\n\n11.2 Cumulative losses may be run-off in accordance with the run-off of the business of the relevant Related Product Group.  \n\n11.3 If at a reporting date it is established, in respect of a Related Product Group which has cumulative losses recorded, that future profits are now expected the present value of that profit must be utilised:\n\n1.  firstly, in offsetting the cumulative losses; and then\n2.  to the extent available, in producing Profit Margins in excess of the Adequacy Threshold.\n\n11.4 There must be no release of profit as a consequence of the combining of Related Product Groups. Where there is grouping of previously separate Related Product Groups, the Policy Liability of the combined Related Product Group must equal the sum of the Policy Liability of the two separate groups immediately prior to the grouping. Cumulative losses that previously existed in respect of the separate groups must be extinguished, except in the case where cumulative losses existed for both separate Related Product Groups.\n\n11.5 The Adequacy Threshold for the Value of Future Best Estimate Bonuses and Shareholder Profits under Related Product Groups in respect of benefits that are contractually linked to the performance of the assets held (i.e. where a risk free discount rate is not used to discount future expected cash flows) is equal to the difference between:\n\n1.  the Best Estimate Liability on Basis 2 (either in accordance with paragraph 9.1.3 or paragraph 10.1.3, whichever is applicable), but using a risk free discount rate (or rates) based on the current observable, objective rates that relate to the nature, structure and term of the future liability cash flows; and\n2.  the Best Estimate Liability on Basis 2.\n\n11.6 For all other Related Product Groups the Adequacy Threshold is zero.\n\n## SECTION 12 Reinsurance\n\n12.1 Outwards reinsurance that meets the definition of a Life Insurance Contract is to be measured as if it were a negative liability, even though the measurement result may be recognised as an asset in the company’s financial statements. For this purpose the Reinsured Policy Liability will therefore consist of both a Reinsured Best Estimate Liability and the Value of Reinsured Profit Margins. For the purpose of this standard, inwards reinsurance is to be treated the same as direct insurance business.\n\n12.2 The principles of this standard apply to both the calculation of the gross Policy Liability and the Reinsured Policy Liability. In particular, where future profits are expected to arise in respect of a reinsurance arrangement (looked at from the reinsurer’s perspective) the present value of those future profits is to be included in the Reinsured Policy Liability as Value of Reinsured Profit Margins. However, where losses are expected, these are to be recognised, except as allowed under paragraph 12.5.\n\n12.3 If the reinsurance relates directly and solely to the direct insurance business of a single Related Product Group then the reinsurance may be included within that same Related Product Group for the purposes of Section 11 of this standard. If the reinsurance does not relate directly and solely to the direct insurance business of a single Related Product Group then the reinsurance must be\n\n  \n\nappropriately allocated to Related Product Groups for the purposes of Section 11 of this Standard. That allocation must reflect:\n\n1.  the insurance and financial risks to which the reinsurance relates; and\n2.  an appropriate relationship between those risks and the Related Product Groups.\n\n12.4 In undertaking the allocation described in paragraph 12.3 regard must be had for a diligent assessment of:\n\n1.  the purpose of the company in entering the reinsurance; and\n2.  the contribution of that reinsurance to the business of the company;\n\nwhile retaining the integrity of the principles of section 3 of this Standard.\n\n12.5 As a result of the allocation of reinsurance business to Related Product Groups, losses expected in relation to the reinsurance business need only be recognised if they exceed the value of expected future profits in respect of the associated direct insurance business in the Related Product Group, and vice versa. However, the Profit Margins in respect of the reinsurance must continue to be determined separately from the Profit Margins in relation to the associated direct insurance business.\n\n  \n\n# PART D – GENERAL REQUIREMENTS FOR ALL FORMS OF POLICY AND ACTUARY’S STATEMENT\n\n## SECTION 13 Allocation of Expenses\n\nOverview\n\nAllocation of the expenses of the company is integral to the principles of this standard for the determination of the emergence of profit. The methodologies of this standard require the expenses of the company to be allocated both into the expense categories (e.g. acquisition, maintenance and investment management) and into related product groups covering both Life Insurance Contracts and Life Investment Contracts.\n\nFor those expenses not able to be directly allocated, a process of apportionment between the expense categories and between product groups is necessary. This section provides a set of principles within which the allocation is undertaken, and against which the mechanics of the apportionment process are assessed. It is not the objective of this section to be prescriptive either in terms of the mechanics of the apportionment process or in the specifics of the allocation of particular types of expenses.\n\nIt is acknowledged that the allocation of certain expenses to expense categories or particular products will require greater judgement than others. Allocation of such expenses must be based on a considered analysis of the particular circumstances of the company – the objective in incurring that expense and the outcome achieved. If at the end of this process there remains doubt as to the appropriate expense category, the expense must be allocated to maintenance expenses.\n\nThere will be circumstances in which an expense derives from an activity outside the normal business activities of the company and is not recurrent in nature. It is appropriate to recognise the one-off nature of such expenses in undertaking the allocation for the purposes of this standard.\n\nThe principles described in this section are equally applicable to the circumstances of allocation of the actual expenses and the expected expenses of the company.\n\nIn respect of Life Investment Contracts, Acquisition Expenses will need to be further split between those that may be deferred in accordance with relevant accounting standards, and those that are to be treated as overheads. However, for the purposes of the Solvency Standard, the Capital Adequacy Standard and the Management Capital Standard, Acquisition Expenses in respect of Life Investment Contracts as determined by this expense allocation are to include acquisition overheads.\n\n13.1 Expenses for each Related Product Group are to be allocated to the following Expense Categories:\n\n1.  Acquisition Expenses;\n2.  Maintenance Expenses;\n3.  Investment Expenses; and\n4.  One-Off Expenses.\n\n13.2 Each Expense Category must include all relevant expenses whether direct or indirect and in aggregate the Expense Categories must include the total expenses of the company (including acquisition overheads in respect of Life Investment Contracts) other than one-off expenses determined in accordance with paragraph 13.10. Total expenses for this purpose are total operating expenses as disclosed in the financial statements.\n\n13.3 Each Related Product Group must include all relevant expenses whether direct or indirect and in aggregate the Related Product Groups must include the total expenses of the company. It is considered appropriate for this purpose to treat the shareholders’ retained profits and capital as if it were a notional Related Product Group.\n\n13.4 To the extent that an expense is directly attributable to a particular Expense Category or a particular Related Product Group, it must be so allocated.\n\n13.5 It is recognised that there are circumstances where arrangements (internal or external) provide for the limitation of the expenses borne by a particular product group. Such arrangements, to the extent substantiated as bona fide by the Actuary, may be reflected in the final allocation of expenses provided transparency of the allocation process is retained.\n\n13.6 An expense which is not directly attributable to a particular Expense Category or Related Product Group must be appropriately allocated. That allocation must reflect:\n\n1.  the Functional Activities to which the expense relates; and\n2.  an appropriate relationship between those Functional Activities and both the Expense Categories and the Related Product Groups.\n\n13.7 In undertaking the allocation described in paragraph 13.6 regard must be had for a diligent assessment of:\n\n1.  the purpose of the company in incurring a particular expense; and\n2.  the contribution of that expense to the business of the company;\n\nwhile retaining the integrity of the principles of section 3 of this Standard.\n\n  \nApportionment Process\n\n13.8 Processes of apportionment will be required, to a greater or lesser extent, in undertaking the allocation of expenses. These processes must be based on recent analyses of the operations of the life business and the identification of appropriate Expense Drivers and related expense apportionment ratios.\n\n13.9 Service Agreements\n\n13.9.1 Where activities of the company are being provided externally, through a service agreement or other contractual arrangement, the allocation of the company’s expenses relating to those activities must be reasonably consistent with the principles of this section. Where the service company fees are unreasonable as a basis for the allocation, the Actuary must determine an alternative allocation applying the principles of this section on a ‘look through’ basis.\n\n13.9.2 The information required to undertake this allocation should be sought from the service provider. Where practical difficulties arise in accessing the required information other methods, such as reference to appropriate industry benchmarks, may be employed.\n\n13.10 One-Off Expenses\n\n13.10.1 It is appropriate, in the context of expense allocation undertaken for the purposes of this Standard, to recognise one-off expenses. To achieve such recognition an expense must be, of itself:\n\n1.  material in accordance with the provisions of section 14; and\n2.  not incurred as part of the normal ongoing operations of the company; and\n3.  not regularly recurring in nature.\n\n13.10.2 One-off expenses, while allocated to Expense Categories for financial reporting purposes, need not be explicitly allocated (to Expense Categories or Related Product Groups) for the purposes of this Standard.\n\n13.11 Friendly Societies\n\n13.11.1 For expense allocation purposes a friendly society is to be regarded as two separate companies, namely:\n\n1.  the Management Fund in isolation; and\n2.  the sum of all the Benefit Funds.\n\n13.11.2 All the expenses of the society are to be allocated to the Management Fund, except in certain cases when some direct costs are allocated to a Benefit Fund where that Benefit Fund rules allow this.\n\n13.11.3 The expenses of the Benefit Funds (other than certain direct costs) are represented by the fees payable to the Management Fund under the Benefit Fund rules. For the purpose of allocating those expenses to the relevant Expense Categories in accordance with paragraph 13.1, the provisions under paragraph 13.9 in relation to Service Agreements are applicable.\n\n13.11.4 Where an allocation of the expenses of the Management Fund relating to life insurance activities into Expense Categories is not undertaken, acquisition expenses must be taken as 50% of the total expenses related to the life insurance business.\n\n## SECTION 14 Materiality\n\nOverview\n\nParticular values or components are considered material to the overall result of a calculation when their mis-statement or omission would cause that result to be misleading to the users of the information.\n\nMateriality tests assess the significance of the particular value/component by relating it to the amount of the overall result to which it contributes.\n\n14.1 The Policy Liability determined in accordance with this standard is subject to materiality standards applied at a statutory fund level.\n\n14.2 The base amount for materiality purposes is:\n\n1.  in respect of components of the profit and loss statement, the operating profit; and\n2.  in respect of components of the regulatory balance sheet, the difference between the assets of the statutory fund and the sum of the Policy Liabilities and Other Liabilities of that fund.\n\n14.3 While materiality must be applied at the statutory fund level, so that appropriate values are placed on the policy liabilities of each fund, the materiality of the statutory fund relative to the size of the company overall may be taken into account.\n\n14.4 While assessing materiality will always be a matter of professional judgement, the following quantitative thresholds are generally to be used:\n\n1.  variations in amounts of 10% or more of the base amount may be presumed material; and\n2.  variations in amounts of 5% or less of the base amount may be presumed immaterial.\n\n## SECTION 15 Initial Calculation of Policy Liability\n\nOverview\n\nWhen Policy Liabilities are first calculated in accordance with the latest version of this Standard, the calculation of Profit Margins and/or Acquisition Expense Recovery Components for in force business should have regard to the history of that business. Best Estimate Bonuses should be determined consistently.\n\nAlternative approaches may be appropriate, and the choice of approach will be a matter for professional actuarial judgement. In making that judgement consideration should be given to :\n\n the available data; and\n\n the type of benefit; and\n\n the duration the business has been in force; and\n\n materiality.\n\n15.1 In first applying the latest version of this Standard to in force Related Product Groups, the Actuary must seek to determine a reasonable estimate of the position, at the beginning of the reporting period, that would have existed had the latest version of this Standard been applied since Commencement.\n\n15.2 Where the valuation of policy liabilities in respect of Life Insurance Contracts, and reporting of profit, has previously been undertaken on a basis consistent with the principles of a then current version of the Valuation Standard it may be appropriate that those previous calculations be acknowledged as satisfying the principles of this section, provided that:\n\n1.  the Value of Future Best Estimate Bonuses and Shareholder Profits that would be determined under this standard exceeds the Adequacy Threshold; and\n2.  the result is not considered to be materially different from that which would arise under a strict application of paragraph 15.1.\n\n## SECTION 16 Statement Relating to the Valuation\n\nOverview\n\nIn order to provide transparency of the company’s financial statements, it is required that full disclosure be made by the Actuary in respect of the processes employed in accordance with this Standard.\n\nRegard must be had for the disclosure requirements prescribed in the standards of the Australian Accounting Standard Board that are relevant to life insurance business (in particular AASB 1038) and the relevant requirements of APRA through Prudential Rules under the Life Act.\n\nFinancial Statements\n\n16.1 At each reporting date the Actuary must provide for inclusion in the regulatory financial statements a summary of the significant elements of the calculation processes and significant assumptions used in deriving the results.\n\nFinancial Condition Report\n\n16.2 As at each reporting date the Actuary must provide in the investigation report required by section 113 or 115 of the Act, details of the calculation processes and the assumptions used in deriving the results.","sortOrder":14},{"sectionNumber":"Investment Experience of Assets Backing ","sectionType":"part","heading":"Investment Experience of Assets Backing them.","content":"## Investment Experience of Assets Backing them.\n\nOverview\n\nA change in the discount rate (and other related economic assumptions) at the reporting date may occur because of:\n\n changes in the market conditions; and/or\n\n other changes (such as a change in the mix of assets backing the benefits that are dependent on investment performance).\n\nThe recalculation process described in this section results in the Policy Liability reflecting the effect of changes in discount rates (and other related economic assumptions) due to market conditions only . The effect of other changes in discount rates or other assumptions is spread over the future benefit term, through the recalculation process.\n\nWhere the only change in the Best Estimate Assumptions is a change in the discount rates (and other related economic assumptions) due to a change in market conditions, the recalculation process will result in the Profit Margins and Acquisition Expense Recovery Components being unchanged.\n\n9.1 Recalculation of Profit Margins\n\n9.1.1 Where Profit Margins are determined at Commencement, the principles of section 3 require a recalculation of those Profit Margins at each subsequent reporting date to ensure that future expected profits are neither released prematurely nor deferred inappropriately.\n\n9.1.2 The methodology detailed below produces results in accordance with the principles of section 3. Other methods may be appropriate where the Actuary can demonstrate that the principles have been met.\n\n9.1.3 A recalculation of Profit Margins at the reporting date may be carried out as follows:\n\n1.  derive the value of expected future profits at the reporting date as:\n\nBest Estimate Liability (on Basis 1)\n\nplus Value of expected future profits (on Basis 1)\n\nless Best Estimate Liability (on Basis 2);\n\nand\n\n1.  recalculate the Profit Margins as:\n\nValue of expected future profits (from (a) )\n\ndivided by\n\nValue of the Profit Carrier(s) (on Basis 2).\n\nWhere\n\nBasis 1 uses the Best Estimate Assumptions and Profit Margins at the previous reporting date, except for the discount rate and related economic assumptions - see paragraph 9.2; and\n\nBasis 2 uses the Best Estimate Assumptions at the current reporting date.\n\n9.2 Discount Rate\n\n9.2.1 The discount rate (and related economic assumptions) used for calculations on Basis 1 is determined as that used at the previous reporting date adjusted only to the extent that there have been changes in market conditions.\n\n9.2.2 A consistent approach is to be used in respect of economic assumptions related to the discount rate; for example, the investment earnings and inflation assumptions.\n\n9.3 Recalculation of Acquisition Expense Recovery Components\n\n9.3.1 Where Acquisition Expense Recovery Components are determined at Commencement the principles of section 3 require a recalculation of those components at each subsequent reporting date to ensure that future expected profits are neither released prematurely nor deferred inappropriately.\n\n9.3.2 The methodology detailed below produces results in accordance with the principles of section 3. Other methods may be appropriate where the Actuary can demonstrate that the principles have been met.\n\n9.3.3 A recalculation of Acquisition Expense Recovery Components at the reporting date may be carried out as follows:\n\n1.  derive the value of the expected future acquisition expense recoveries at the reporting date as:\n\nAcquisition Expense Recovery Components\n\nmultiplied by\n\nValue of Acquisition Expense Recovery Carrier(s) (on Basis 1);\n\nand\n\n1.  recalculate the Acquisition Expense Recovery Components as:\n\nValue of the expected future acquisition expense recoveries (from (a))\n\ndivided by\n\nValue of Acquisition Expense Recovery Carrier(s)\n\n(on Basis 2).\n\n  \nWhere\n\nBasis 1 uses the Best Estimate Assumptions at the previous reporting date, except for the discount rate and related economic assumptions - see paragraph 9.2; and\n\nBasis 2 uses the Best Estimate Assumptions at the current reporting date.","sortOrder":15},{"sectionNumber":"10","sectionType":"part","heading":"Reporting Date Recalculations - Benefits Providing a Discretionary Entitlement to Share in the Investment Experience of Assets Backing them.","content":"## SECTION 10 Reporting Date Recalculations - Benefits Providing a Discretionary Entitlement to Share in the Investment Experience of Assets Backing them.\n\nOverview\n\nThe recalculation methodology described in this section establishes how the Policy Liability changes and, hence, how profit emerges over the period for discretionary business. The objective of the methodology is to determine Operating Profit in accordance with the framework of the Act.\n\nFor a Participating Benefit (including a friendly society benefit under a benefit fund where there is a provision for distribution of unallocated surpluses to policy owners), two important aspects of this framework are;\n\n1.  The allocation of Operating Profit is a distinct process from the distribution of retained profits. It is the value of declared Bonuses and shareholder transfers out of the fund which are distributions of retained profits (inclusive of the Operating Profit allocated in the period)\n\nIt is the Operating Profit which is the amount allocated between policy owners retained profits (or unallocated surplus in the case of friendly societies) and shareholders retained profits.\n\n1.  Operating Profit includes shareholder profit and policy owner profit. It comprises:\n\n-   the value of current period Best Estimate Bonuses (including best estimate interim and terminal bonuses and the value of best estimate reversionary bonuses) and Best Estimate Shareholder Profits; and\n-   non-investment Experience Profit.\n\nFor Non-Participating Benefits which have an entitlement to discretionary additions, the approaches described in this section may be applied for recalculating Discretionary Additions and Profit Margins. The section is to be interpreted by substituting “discretionary addition” for “bonus”. It must be recognised that the “discretionary addition” is not a “bonus”, and consequently the cost of any “discretionary addition” in the current period forms part of the Policy Liability at the reporting date, while the cost of any “bonus” in the current period is an allocation and distribution of current period operating profit and does not form part of the Policy Liability at the reporting date.\n\nIt is noted that for Participating Benefits (but not Non-Participating Benefits which have an entitlement to discretionary additions), the recalculation methodology means a change in assumptions (predominantly non-investment assumptions) may affect current year profit, through changes in the rate of Best Estimate Bonus. In these specific circumstances, this result is considered appropriate and in compliance with the intent of the principles of section 3.\n\n10.1 Recalculation of Profit Margins\n\n10.1.1 Where Profit Margins are determined at Commencement, the principles of section 3 require a recalculation of those Profit Margins at each subsequent reporting date to ensure that future expected profits are neither released prematurely nor deferred inappropriately.\n\n10.1.2 The methodology detailed below is deemed to produce results in accordance with the principles of section 3. Other methods may be appropriate where the Actuary can demonstrate that the principles have been met.\n\n10.1.3 A recalculation of Profit Margins at the reporting date may be carried out as follows:\n\n1.  derive the value of expected future policy owner and shareholder profits at the reporting date as:\n\nValue of Supporting Assets\n\nless Best Estimate Liability (on Basis 2)\n\nless Value of current period Bonuses and Shareholder Profits (on Basis 2);\n\nand\n\n1.  recalculate the Profit Margins as:\n\nValue of expected future profits (from (a) )\n\nless Value of future Best Estimate Bonuses (on Basis 2)\n\ndivided by\n\nValue of the Profit Carrier(s) (on Basis 2).\n\nWhere\n\nValue of Supporting Assets is calculated according to paragraph 10.2;\n\nBasis 2 uses the Best Estimate Assumptions at the current reporting date;\n\nValue of current period Bonuses is determined as the cost of Bonus according to paragraph 10.3; and\n\nThe relationship between Bonuses and Shareholder Profits must be in accordance with paragraph 4.1.3.\n\n10.2 Value of Supporting Assets\n\n10.2.1 The Value of Supporting Assets is determined as:\n\n1.  the Policy Liability at the end of the previous reporting period; plus\n2.  the cost of declared Bonuses at the end of the previous period; plus\n3.  the actual policy related cash flows and investment experience as reported in the regulatory financial statements; less\n4.  the expected Shareholder Profits emerging over the period and the non-investment Experience Profit.\n\n10.2.2 The Value of Supporting Assets must be calculated so as to attribute no value of assets to terminated benefits.\n\n10.3 Cost of Bonus\n\n10.3.1 The cost of Bonus at the reporting date (whether best estimate or declared) must reflect the cash value to the policy owners of those Bonuses at the reporting date.\n\n10.3.2 Where Bonus at the reporting date does not acquire an immediate cash value, but rather value vests in the policy owner over some defined period of time, the Actuary, in determining the cost of Bonus, must allow an appropriate value for that unvested Bonus.\n\n  \n\n10.3.3 Terminal bonus is included in the calculation of cost of Bonus to the extent it is immediately vested in the policy owner and is guaranteed.","sortOrder":16},{"sectionNumber":"11","sectionType":"part","heading":"Loss Recognition","content":"## SECTION 11 Loss Recognition\n\nOverview\n\nWhere at a reporting date the value of future profits for a Related Product Group falls below the Adequacy Threshold for that Related Product Group, the resulting shortfall is not spread over the benefit term (as are expected future profits above the Adequacy Threshold) but is recognised as an immediate loss at that date. This is in accordance with the principles of section 3 and is achieved by setting the relevant Profit Margins to an amount such that the value of future profits is equal to the Adequacy Threshold at the reporting date. This process is carried out for each Related Product Group.\n\nA record of cumulative losses is kept for each Related Product Group. Before a Related Product Group can have a value of future profits in excess of the Adequacy Threshold, cumulative losses must have been offset. Once cumulative losses have been eliminated for the Related Product Group it will return to a position of adequate future profits.\n\n11.1 A record of the cumulative amount of losses recognised in accordance with the principles of section 3 must be maintained for each Related Product Group.\n\n11.2 Cumulative losses may be run-off in accordance with the run-off of the business of the relevant Related Product Group.  \n\n11.3 If at a reporting date it is established, in respect of a Related Product Group which has cumulative losses recorded, that future profits are now expected the present value of that profit must be utilised:\n\n1.  firstly, in offsetting the cumulative losses; and then\n2.  to the extent available, in producing Profit Margins in excess of the Adequacy Threshold.\n\n11.4 There must be no release of profit as a consequence of the combining of Related Product Groups. Where there is grouping of previously separate Related Product Groups, the Policy Liability of the combined Related Product Group must equal the sum of the Policy Liability of the two separate groups immediately prior to the grouping. Cumulative losses that previously existed in respect of the separate groups must be extinguished, except in the case where cumulative losses existed for both separate Related Product Groups.\n\n11.5 The Adequacy Threshold for the Value of Future Best Estimate Bonuses and Shareholder Profits under Related Product Groups in respect of benefits that are contractually linked to the performance of the assets held (i.e. where a risk free discount rate is not used to discount future expected cash flows) is equal to the difference between:\n\n1.  the Best Estimate Liability on Basis 2 (either in accordance with paragraph 9.1.3 or paragraph 10.1.3, whichever is applicable), but using a risk free discount rate (or rates) based on the current observable, objective rates that relate to the nature, structure and term of the future liability cash flows; and\n2.  the Best Estimate Liability on Basis 2.\n\n11.6 For all other Related Product Groups the Adequacy Threshold is zero.","sortOrder":17},{"sectionNumber":"12","sectionType":"part","heading":"Reinsurance","content":"## SECTION 12 Reinsurance\n\n12.1 Outwards reinsurance that meets the definition of a Life Insurance Contract is to be measured as if it were a negative liability, even though the measurement result may be recognised as an asset in the company’s financial statements. For this purpose the Reinsured Policy Liability will therefore consist of both a Reinsured Best Estimate Liability and the Value of Reinsured Profit Margins. For the purpose of this standard, inwards reinsurance is to be treated the same as direct insurance business.\n\n12.2 The principles of this standard apply to both the calculation of the gross Policy Liability and the Reinsured Policy Liability. In particular, where future profits are expected to arise in respect of a reinsurance arrangement (looked at from the reinsurer’s perspective) the present value of those future profits is to be included in the Reinsured Policy Liability as Value of Reinsured Profit Margins. However, where losses are expected, these are to be recognised, except as allowed under paragraph 12.5.\n\n12.3 If the reinsurance relates directly and solely to the direct insurance business of a single Related Product Group then the reinsurance may be included within that same Related Product Group for the purposes of Section 11 of this standard. If the reinsurance does not relate directly and solely to the direct insurance business of a single Related Product Group then the reinsurance must be\n\n  \n\nappropriately allocated to Related Product Groups for the purposes of Section 11 of this Standard. That allocation must reflect:\n\n1.  the insurance and financial risks to which the reinsurance relates; and\n2.  an appropriate relationship between those risks and the Related Product Groups.\n\n12.4 In undertaking the allocation described in paragraph 12.3 regard must be had for a diligent assessment of:\n\n1.  the purpose of the company in entering the reinsurance; and\n2.  the contribution of that reinsurance to the business of the company;\n\nwhile retaining the integrity of the principles of section 3 of this Standard.\n\n12.5 As a result of the allocation of reinsurance business to Related Product Groups, losses expected in relation to the reinsurance business need only be recognised if they exceed the value of expected future profits in respect of the associated direct insurance business in the Related Product Group, and vice versa. However, the Profit Margins in respect of the reinsurance must continue to be determined separately from the Profit Margins in relation to the associated direct insurance business.","sortOrder":18},{"sectionNumber":"PART D","sectionType":"part","heading":"GENERAL REQUIREMENTS FOR ALL FORMS OF POLICY AND ACTUARY’S STATEMENT","content":"# PART D – GENERAL REQUIREMENTS FOR ALL FORMS OF POLICY AND ACTUARY’S STATEMENT","sortOrder":19},{"sectionNumber":"13","sectionType":"part","heading":"Allocation of Expenses","content":"## SECTION 13 Allocation of Expenses\n\nOverview\n\nAllocation of the expenses of the company is integral to the principles of this standard for the determination of the emergence of profit. The methodologies of this standard require the expenses of the company to be allocated both into the expense categories (e.g. acquisition, maintenance and investment management) and into related product groups covering both Life Insurance Contracts and Life Investment Contracts.\n\nFor those expenses not able to be directly allocated, a process of apportionment between the expense categories and between product groups is necessary. This section provides a set of principles within which the allocation is undertaken, and against which the mechanics of the apportionment process are assessed. It is not the objective of this section to be prescriptive either in terms of the mechanics of the apportionment process or in the specifics of the allocation of particular types of expenses.\n\nIt is acknowledged that the allocation of certain expenses to expense categories or particular products will require greater judgement than others. Allocation of such expenses must be based on a considered analysis of the particular circumstances of the company – the objective in incurring that expense and the outcome achieved. If at the end of this process there remains doubt as to the appropriate expense category, the expense must be allocated to maintenance expenses.\n\nThere will be circumstances in which an expense derives from an activity outside the normal business activities of the company and is not recurrent in nature. It is appropriate to recognise the one-off nature of such expenses in undertaking the allocation for the purposes of this standard.\n\nThe principles described in this section are equally applicable to the circumstances of allocation of the actual expenses and the expected expenses of the company.\n\nIn respect of Life Investment Contracts, Acquisition Expenses will need to be further split between those that may be deferred in accordance with relevant accounting standards, and those that are to be treated as overheads. However, for the purposes of the Solvency Standard, the Capital Adequacy Standard and the Management Capital Standard, Acquisition Expenses in respect of Life Investment Contracts as determined by this expense allocation are to include acquisition overheads.\n\n13.1 Expenses for each Related Product Group are to be allocated to the following Expense Categories:\n\n1.  Acquisition Expenses;\n2.  Maintenance Expenses;\n3.  Investment Expenses; and\n4.  One-Off Expenses.\n\n13.2 Each Expense Category must include all relevant expenses whether direct or indirect and in aggregate the Expense Categories must include the total expenses of the company (including acquisition overheads in respect of Life Investment Contracts) other than one-off expenses determined in accordance with paragraph 13.10. Total expenses for this purpose are total operating expenses as disclosed in the financial statements.\n\n13.3 Each Related Product Group must include all relevant expenses whether direct or indirect and in aggregate the Related Product Groups must include the total expenses of the company. It is considered appropriate for this purpose to treat the shareholders’ retained profits and capital as if it were a notional Related Product Group.\n\n13.4 To the extent that an expense is directly attributable to a particular Expense Category or a particular Related Product Group, it must be so allocated.\n\n13.5 It is recognised that there are circumstances where arrangements (internal or external) provide for the limitation of the expenses borne by a particular product group. Such arrangements, to the extent substantiated as bona fide by the Actuary, may be reflected in the final allocation of expenses provided transparency of the allocation process is retained.\n\n13.6 An expense which is not directly attributable to a particular Expense Category or Related Product Group must be appropriately allocated. That allocation must reflect:\n\n1.  the Functional Activities to which the expense relates; and\n2.  an appropriate relationship between those Functional Activities and both the Expense Categories and the Related Product Groups.\n\n13.7 In undertaking the allocation described in paragraph 13.6 regard must be had for a diligent assessment of:\n\n1.  the purpose of the company in incurring a particular expense; and\n2.  the contribution of that expense to the business of the company;\n\nwhile retaining the integrity of the principles of section 3 of this Standard.\n\n  \nApportionment Process\n\n13.8 Processes of apportionment will be required, to a greater or lesser extent, in undertaking the allocation of expenses. These processes must be based on recent analyses of the operations of the life business and the identification of appropriate Expense Drivers and related expense apportionment ratios.\n\n13.9 Service Agreements\n\n13.9.1 Where activities of the company are being provided externally, through a service agreement or other contractual arrangement, the allocation of the company’s expenses relating to those activities must be reasonably consistent with the principles of this section. Where the service company fees are unreasonable as a basis for the allocation, the Actuary must determine an alternative allocation applying the principles of this section on a ‘look through’ basis.\n\n13.9.2 The information required to undertake this allocation should be sought from the service provider. Where practical difficulties arise in accessing the required information other methods, such as reference to appropriate industry benchmarks, may be employed.\n\n13.10 One-Off Expenses\n\n13.10.1 It is appropriate, in the context of expense allocation undertaken for the purposes of this Standard, to recognise one-off expenses. To achieve such recognition an expense must be, of itself:\n\n1.  material in accordance with the provisions of section 14; and\n2.  not incurred as part of the normal ongoing operations of the company; and\n3.  not regularly recurring in nature.\n\n13.10.2 One-off expenses, while allocated to Expense Categories for financial reporting purposes, need not be explicitly allocated (to Expense Categories or Related Product Groups) for the purposes of this Standard.\n\n13.11 Friendly Societies\n\n13.11.1 For expense allocation purposes a friendly society is to be regarded as two separate companies, namely:\n\n1.  the Management Fund in isolation; and\n2.  the sum of all the Benefit Funds.\n\n13.11.2 All the expenses of the society are to be allocated to the Management Fund, except in certain cases when some direct costs are allocated to a Benefit Fund where that Benefit Fund rules allow this.\n\n13.11.3 The expenses of the Benefit Funds (other than certain direct costs) are represented by the fees payable to the Management Fund under the Benefit Fund rules. For the purpose of allocating those expenses to the relevant Expense Categories in accordance with paragraph 13.1, the provisions under paragraph 13.9 in relation to Service Agreements are applicable.\n\n13.11.4 Where an allocation of the expenses of the Management Fund relating to life insurance activities into Expense Categories is not undertaken, acquisition expenses must be taken as 50% of the total expenses related to the life insurance business.","sortOrder":20},{"sectionNumber":"14","sectionType":"part","heading":"Materiality","content":"## SECTION 14 Materiality\n\nOverview\n\nParticular values or components are considered material to the overall result of a calculation when their mis-statement or omission would cause that result to be misleading to the users of the information.\n\nMateriality tests assess the significance of the particular value/component by relating it to the amount of the overall result to which it contributes.\n\n14.1 The Policy Liability determined in accordance with this standard is subject to materiality standards applied at a statutory fund level.\n\n14.2 The base amount for materiality purposes is:\n\n1.  in respect of components of the profit and loss statement, the operating profit; and\n2.  in respect of components of the regulatory balance sheet, the difference between the assets of the statutory fund and the sum of the Policy Liabilities and Other Liabilities of that fund.\n\n14.3 While materiality must be applied at the statutory fund level, so that appropriate values are placed on the policy liabilities of each fund, the materiality of the statutory fund relative to the size of the company overall may be taken into account.\n\n14.4 While assessing materiality will always be a matter of professional judgement, the following quantitative thresholds are generally to be used:\n\n1.  variations in amounts of 10% or more of the base amount may be presumed material; and\n2.  variations in amounts of 5% or less of the base amount may be presumed immaterial.","sortOrder":21},{"sectionNumber":"15","sectionType":"part","heading":"Initial Calculation of Policy Liability","content":"## SECTION 15 Initial Calculation of Policy Liability\n\nOverview\n\nWhen Policy Liabilities are first calculated in accordance with the latest version of this Standard, the calculation of Profit Margins and/or Acquisition Expense Recovery Components for in force business should have regard to the history of that business. Best Estimate Bonuses should be determined consistently.\n\nAlternative approaches may be appropriate, and the choice of approach will be a matter for professional actuarial judgement. In making that judgement consideration should be given to :\n\n the available data; and\n\n the type of benefit; and\n\n the duration the business has been in force; and\n\n materiality.\n\n15.1 In first applying the latest version of this Standard to in force Related Product Groups, the Actuary must seek to determine a reasonable estimate of the position, at the beginning of the reporting period, that would have existed had the latest version of this Standard been applied since Commencement.\n\n15.2 Where the valuation of policy liabilities in respect of Life Insurance Contracts, and reporting of profit, has previously been undertaken on a basis consistent with the principles of a then current version of the Valuation Standard it may be appropriate that those previous calculations be acknowledged as satisfying the principles of this section, provided that:\n\n1.  the Value of Future Best Estimate Bonuses and Shareholder Profits that would be determined under this standard exceeds the Adequacy Threshold; and\n2.  the result is not considered to be materially different from that which would arise under a strict application of paragraph 15.1.","sortOrder":22},{"sectionNumber":"16","sectionType":"part","heading":"Statement Relating to the Valuation","content":"## SECTION 16 Statement Relating to the Valuation\n\nOverview\n\nIn order to provide transparency of the company’s financial statements, it is required that full disclosure be made by the Actuary in respect of the processes employed in accordance with this Standard.\n\nRegard must be had for the disclosure requirements prescribed in the standards of the Australian Accounting Standard Board that are relevant to life insurance business (in particular AASB 1038) and the relevant requirements of APRA through Prudential Rules under the Life Act.\n\nFinancial Statements\n\n16.1 At each reporting date the Actuary must provide for inclusion in the regulatory financial statements a summary of the significant elements of the calculation processes and significant assumptions used in deriving the results.\n\nFinancial Condition Report\n\n16.2 As at each reporting date the Actuary must provide in the investigation report required by section 113 or 115 of the Act, details of the calculation processes and the assumptions used in deriving the results.","sortOrder":23},{"sectionNumber":"a) the risks associated with inadequate ","sectionType":"subdivision","heading":"a) the risks associated with inadequate provisioning for future servicing expenses; and","content":"DECEMBER 2005\n\nActuarial Standard 6.03\n\nMANAGEMENT CAPITAL STANDARD\n\n![](image.003.png)Life Insurance\n\nActuarial Standards Board\n\n  \nTABLE OF CONTENTS\n\nPage\n\n[INTRODUCTION](#_Toc121560057)\n\n[The Standard](#_Toc121560058)\n\n[Application of the Management Capital Standard](#_Toc121560059)\n\n[PART A – PRINCIPLES](#_Toc121560060)\n\n[SECTION 1 The Management Capital Standard](#_Toc121560061)\n\n[SECTION 2 Scenarios of Adverse Conditions](#_Toc121560062)\n\n[SECTION 3 The Liability Risks](#_Toc121560063)\n\n[SECTION 4 Asset Risks](#_Toc121560064)\n\n[SECTION 5 New Business Reserve](#_Toc121560065)\n\n[PART B – METHODOLOGIES](#_Toc121560066)\n\n[SECTION 6 Determination of the Management Capital Requirement........](#_Toc121560067)\n\n[SECTION 7 The Liability Component](#_Toc121560068)\n\n[SECTION 8 Expense Reserve](#_Toc121560069)\n\n[SECTION 9 The Inadmissible Assets Reserve](#_Toc121560070)\n\n[SECTION 10 The Resilience Reserve](#_Toc121560071)\n\n[SECTION 11 New Business Reserve](#_Toc121560072)\n\n[SECTION 12 Transitional Arrangements](#_Toc121560073)\n\n[SECTION 13 Materiality](#_Toc121560074)\n\n[PART C – ACTUARY’S STATEMENT](#_Toc121560075)\n\n[SECTION 14 Statement Relating to the Determination](#_Toc121560076)\n\n  \nINTRODUCTION\n\nThe Standard\n\nThe Management Capital Standard is established under the Life Insurance Act 1995 (the Act), and is an integral component of the prudential regulation regime for life insurance companies implemented under that Act.\n\nThe Act establishes a two tier capital requirement on the statutory funds of the life company with each tier considering the capital requirements in a different set of circumstances.\n\nFurther, it establishes a requirement to hold a minimum amount of capital outside the statutory funds of the company in relation to the risks associated with business activities undertaken outside the statutory funds but within the legal entity.\n\nThis standard looks at this latter capital requirement.\n\nThe stated purpose of the Management Capital Standard in the Act is:\n\n“to ensure, as far as practicable, that:\n\n(a) the financial position of a life company reflects an appropriate capital commitment, outside of the statutory funds of the company, to the life insurance business of the company; and\n\n(b) a life company will be able to meet its obligations in respect of any business it carries on that is not life insurance business as those obligations fall due.”\n\nTherefore, the purpose of the Management Capital Standard is to prescribe the minimum capital requirement to be held outside the statutory funds to ensure that under a range of adverse operating circumstances the company would be expected to be in a position to meet its trading commitments and adequately service its policy owners.\n\nApplication to Friendly Societies\n\nThe Act was amended in 1999 to extend its application to friendly societies that undertake life insurance business. This standard is applicable to all life companies (registered under the Act) including friendly societies. In its application, the standard will, at times, make distinction between friendly societies and other life companies.\n\n  \nInteraction with Solvency and Capital Adequacy Standards\n\nIt is noted that certain risks related to the life business of a friendly society are incurred in the management fund, whereas for other life companies these risks are incurred, and provided for, in the statutory funds.\n\nTherefore, the Solvency Standard, Capital Adequacy Standard and the Management Capital Standard involve a degree of interaction and should be considered together.\n\nApplication of the Management Capital Standard\n\nThe Management Capital Standard is made for the purposes of section 73B of the Life Insurance Act 1995.\n\nIt applies:\n\n1.  in respect of a registered life company, other than an eligible foreign life insurance company where the business outside their Australian statutory funds is subject to appropriate overseas prudential regulation; and\n2.  at all times from 31 December 2005.\n\nThe Standard has been written in the context of Australian legislation and bases of taxation. Appropriate adjustment must be made, for example to allow for different bases of taxation, where this Standard is being applied to overseas business.\n\n  \nPART A – PRINCIPLES\n\nSECTION 1 The Management Capital Standard\n\nOverview\n\nThe Management Capital Standard requires that the life company maintains at all times a minimum amount of capital outside the statutory funds - the Management Capital Requirement.\n\nThe Management Capital Requirement is determined by considering the various risks which could impact the security of the company’s operations and, by consequence, policy owner entitlements and requiring the provision of a prudent level of reserve against such risks.\n\nThe approach to determining the Management Capital Requirement recognises the separate and distinct nature of a life company’s statutory funds in respect of its life insurance business and the extent to which the risks associated with undertaking life insurance business are provided for in the Solvency and Capital Adequacy Standards\n\nSecurity of the entitlements of policy owners, however, cannot be considered totally isolated from risks associated with operations outside the statutory funds. In the case of friendly societies, the risks associated with the administration and operational support of the life insurance business are borne outside the statutory funds. Further, a life company may operate businesses (other than life insurance related business) outside its statutory funds. The risks incurred in all respects have implications for the overall security of the company and hence of the policy owners.\n\nIt is not the intention of the standard to provide absolute security for the company or to policy owners. To attempt to do so would be prohibitive to the viability of the industry and hence not in the best interest of the policy owners. Rather, the prescribed reserves provide for a range of adverse but reasonably possible conditions.\n\n1.1 At any time, the life company must have available to the General Fund assets of a value considered sufficient to meet the obligations of the General Fund at that date, under a range of adverse conditions. The amount of assets so required is referred to as the Management Capital Requirement.\n\n1.2 In order that a life company complies with this Standard, any prudentially regulated business other than life insurance business undertaken by the company, either in a statutory fund or the General Fund, must satisfy the legislated capital requirements associated with that business. Examples include, health insurance business undertaken in the statutory fund of a friendly society or general insurance business undertaken in the General Fund of a life company. Eligible foreign life insurance companies are excluded from this Standard provided the business outside their Australian statutory funds is subject to appropriate overseas prudential regulation.\n\n1.3 For the purposes of this standard the General Fund refers to the management fund of a friendly society and the shareholders’ fund of other life companies.\n\nSECTION 2 Scenarios of Adverse Conditions\n\nOverview\n\nIn assessing the Management Capital Requirement of a life company consideration is given to:\n\n the risks which may affect the liabilities related to the operations of the life company other than life insurance business; and\n\n the risks which may affect the value of the assets supporting those liabilities.\n\nThe Management Capital Requirement broadly comprises the following components:\n\n the Liability Component;\n\n the Expense Reserve;\n\n the Inadmissible Assets Reserve;\n\n the Resilience Reserve; and\n\n the New Business Reserve.\n\nThe Liability Component\n\nA realistic value of the liabilities of the fund increased, in the case of life insurance related activities, to reflect assumptions which are more conservative (anticipate a more adverse experience) than best estimate assumptions.\n\nThe Expense Reserve\n\nProvision for the overrun expenses which can occur in the Fund under a closed to new business scenario.\n\nThe Inadmissible Assets Reserve\n\nA reserve against the risks associated with:\n\n assets, the value of which is dependent on the ongoing conduct of business;\n\n holdings in associated or subsidiary Financial Services entities; and\n\n for the purposes of this Standard, any asset in the regulatory financial statements not recorded at fair value.\n\nThe Resilience Reserve\n\nMismatching of asset and liability exposures necessitates the provision of a reserve for adverse movements in the investment markets to the extent they will not be matched by a corresponding movement in the liabilities.\n\nWhen determining the impact of the various risks and adverse conditions on the financial position on the fund, it is required to assess their impact consistently on all assets and liabilities affected. This includes both beneficial and adverse combined effects.\n\nThe New Business Reserve\n\nProvision for planned new business over a prescribed future period of three years, with the intention of securing the continuing capital needs of the company over that period.\n\n2.1 The Management Capital Requirement, in considering scenarios of adverse experience, must provide for risks associated with both the liabilities and the assets of the General Fund.\n\n2.2 The Management Capital Requirement, in principle, is to be determined on a basis consistent with the net realisable market values of the assets and other liabilities of the General Fund, including allowance for realisation costs and, if considered appropriate under the relevant scenarios, discounting of all future cash flows.\n\n2.3 In considering scenarios of adverse experience and adopting a basis for the Management Capital Requirement, the Actuary must allow for all material risks associated with both the liabilities and the assets of the fund, including the interdependencies between these risks that the Actuary considers might apply under such adverse conditions. This is regardless of whether such risks are discussed in the rest of this Standard or not.\n\n2.4 In the case of a friendly society, when considering the scenarios of adverse experience, the Actuary must consider the ability of the benefit funds to be closed to new business and for the obligations of the friendly society to policy owners and creditors to be met as they fall due with a high level of confidence. The prescribed requirements set out within this Standard are designed to allow the obligations of the friendly society to be reliably met under circumstances where a judicial manager would most expeditiously seek for them to be secured. The Actuary should regard that as being achieved by a transfer of all of the assets and liabilities of the benefit funds, plus the expense reserve component of the Management Capital Requirement, to a third party who would then be responsible for meeting the obligations as they fall due, out of the transferred assets. If the Actuary considers that the circumstances of the friendly society are such that the obligations of the friendly society are more likely to be secured by some other means, then the Actuary may need to establish additional reserves for any additional risks or costs that might be incurred under that scenario and that are not otherwise reflected in the prescribed requirements of this Standard or the Solvency Requirements of the benefit funds.\n\n2.5 In determining the Management Capital Requirement for a friendly society the Actuary must allow for the consequences of closing the benefit funds to new business and subsequently meeting the obligations of the friendly society in the context of the circumstances assumed under paragraph 2.4, to the extent that they are not otherwise met by the Solvency Requirement of the benefit funds. This includes a loss of contribution to expenses, a loss of future tax deductions and a change in the value of tax assets and tax liabilities, and a loss of value of business related assets.\n\n2.6 Where the particular combination of risks affecting a company is not explicitly considered within this Standard, the Actuary must establish additional amounts within the Management Capital Requirement, beyond the amounts prescribed. The additional reserve must reflect the purpose and principles of the Standard. It must provide a level of reserving that is consistent with that applying under this Standard in respect of the risks explicitly considered under this Standard. For this purpose, the Actuary may regard the prescribed requirements set out within this Standard, when applied to a typical life company with the combination of risks explicitly considered in this Standard, as designed to provide a level of reserves which broadly meets the following requirements:\n\n1.  Able to cover a combination of adverse circumstances that would be expected to arise once every 200 years;\n2.  Allowing a general time frame of 12 months in which the circumstances arise and the actions under (c) and (d) below follow;\n3.  The reserve required at the end of the period in (b) is able to be determined in accordance with the Management Capital Requirement of this Standard, but allowing for the implementation of plausible risk reduction actions by management at, or after, that time (for example, exiting risky asset positions or other arrangements as would be permitted). For those risks that cannot be eliminated, sufficient reserve will still be required as set out in this Standard; and\n4.  Allowance for management corrective action during the period in (b) is considered to be limited to highly reliable actions only, with conservative response time allowances.\n\n2.7 The criteria of paragraph 2.6 are to be applied allowing for the benefit of any diversification across all risks affecting the company. For the purposes of paragraph 2.6, those risks requiring additional resilience reserves to be established under section 10.9 using the principles of paragraph 4.2.3 are considered to be adequately addressed by those additional reserves.\n\n2.8 The guideline in paragraph 2.6 is intended as a guide when allowing for risks that are not explicitly dealt with under the prescribed basis in this Standard. It is not intended as an alternative basis for issues that are otherwise and adequately dealt with in the prescribed basis. For the avoidance of doubt, the Management Capital Requirement must not be less than that calculated using the basis prescribed in the rest of the Standard, but may be more where there are material risks that are not explicitly dealt with under the prescribed basis.\n\n2.9 It is the principles that are paramount in determining the Management Capital Requirement; methodology is incidental to the principles. However, this does not override the requirement of paragraph 2.8 that the Management Capital Requirement must not be less than that calculated using the prescribed basis.\n\nSECTION 3 The Liability Risks\n\nThe Liability Component\n\n3.1 The Liability Component must make provision for:\n\n1.  the realistic value of the total liabilities of the General Fund; and\n2.  the risks pertaining to the life insurance activities of the company which are borne in the General Fund.\n\n3.2 Risks related to Life Business Activities\n\n3.2.1 In the case of a life company other than a friendly society, the margin for the risks described in this paragraph 3.2 is Nil; these risks are borne, and hence provided for, in the statutory funds. (Refer to the Solvency and Capital Adequacy Standards).\n\n  \n\n3.2.2 In the case of a friendly society, the Liability Component must include a reserve for:\n\n#### a) the risks associated with inadequate provisioning for future servicing expenses; and\n\n#### b) the additional risks that may be borne by the General Fund arising from investment-linked business in the statutory funds.\n\n3.2.3 The bases for determining the reserves described in paragraph 3.2.2 are prescribed (see section 7).\n\nExpense Reserve\n\n3.3 The Management Capital Requirement must provide for capital to be held against the risk of an overrun in the expenses of the General Fund in the particular circumstance of a run-off of the business activities of that fund.\n\nOther Liabilities\n\n3.4 Where the other liabilities of the General Fund (other than a deficit in respect of a defined benefit superannuation fund to which the entity, or an associated entity, is an employer sponsor) are determined based on estimates of future cash flows, these must be reassessed and discounted to the valuation date, on a basis consistent with the overall scenarios of adverse experience being considered (per Section 2).\n\n3.5 Where the entity, or an associated entity, is an employer sponsor of a defined benefit superannuation fund and the other liabilities of the General Fund include a deficit in respect of that fund, and the deficit has been determined using the corridor approach as defined under accounting standard AASB 119 Employee Benefits, the deficit is to be reduced (increased) by the amount of any Unrecognised Actuarial Gains (losses).\n\nSECTION 4 Asset Risks\n\nOverview\n\nThe risks associated with the assets supporting the liabilities are discussed below.\n\nAdverse Market Movements\n\nTo the extent that the value of liabilities is not directly linked to the value of the underlying assets, an adverse movement in the value of the assets effectively reduces the level of reserves supporting the liabilities. It is prudent that a company recognise this risk and hold sufficient capital such that the liabilities would still be able to be met following an adverse market movement.\n\nThe risk of adverse market movements is one of many potentially offsetting risks. It is presumed that, for the asset and liability profile of a typical life insurer, a Resilience Reserve set at the level of sufficiency described in section 4.2 will, with additional reserves determined independently in respect of other risks, produce an overall Management Capital Requirement at the level of sufficiency described in paragraph 2.6.\n\nAsset Liquidation\n\nCertain assets are disclosed in the regulatory financial statements at a value which may be dependent on the ongoing operation of the business. On the cessation of business, the value of those assets would likely be less. Capital is held against that part of the value of such assets which would not be realisable in the adverse circumstance of a wind-down of business.\n\nHoldings in Associated and Subsidiary Financial Services Entities\n\nAssociated and subsidiary Financial Services entities may be exposed to essentially the same environmental and systemic risks as the life insurer. The value of such an entity in excess of its net tangible assets cannot therefore be relied upon to meet the capital requirements of the life insurance company under adverse circumstances. Furthermore, the value taken for such a holding is not to double count any legislated capital requirement of the entity itself.\n\nCredit Risks\n\nIn general, it is considered that the combined effect of adopting the net market value of the assets and the reserves for asset concentration would address the average costs of default and marketability/liquidity risks.\n\nWhere a fund has significant exposure to non-sovereign credit risks the Actuary is to provide an appropriate reserve allowance for such credit risks, along with any other asset risks.\n\nLiquidity Risks\n\nThe Actuary’s general responsibility in assessing and advising management on the financial operations of the company would include consideration of liquidity risks.\n\nOverall Asset Risks\n\nNotwithstanding the prescribed limits of this Standard, the Actuary must have regard to the particular circumstances of the company. If in the opinion of the Actuary the overall portfolio of admissible assets of the General Fund has too little diversification, is too illiquid or has too great an exposure to one obligor of low credit standing, the Actuary must increase the reserves appropriately.\n\nFurthermore, the asset and other liabilities values disclosed in the regulatory financial statements may not be equal to the net market value of those assets and other liabilities, allowing for realisation costs. A reserve for the difference between the reported and net realisable market value of the assets and other liabilities is to be included.\n\nNote\n\nIt is not the intention of these reserves to limit the investment practices of life companies. Rather it is to ensure that the risks associated with particular investment strategies are appropriately assessed and provided for.\n\n4.1 Reserve for Inadmissible Assets\n\n4.1.1 The Management Capital Requirement must provide an amount of capital to be held - the Inadmissible Assets Reserve - in respect of:\n\n1.  an asset which has a value that is dependent upon the continuation of the business;\n2.  holdings in an associated or subsidiary entity which is a Financial Services entity;\n3.  non-realisable (in the context of the scenarios of adverse experience) intangible assets;\n4.  other assets not measured at fair value in the regulatory financial statements; and\n5.  alignment necessary to ensure the remaining assets and the other liabilities are based on net market value.\n\n4.1.2 Assets Used for The Conduct of Business\n\nThe Inadmissible Assets Reserve must provide for the risk that, in the context of the run-off of the business of the General Fund, the value of the asset differs from the value disclosed in the regulatory financial statements.\n\n4.1.3 Holdings in Associated and Subsidiary Entities which are Financial Services Entities\n\nWhere the associated or subsidiary entity is a Financial Services entity the Actuary must establish a reserve to the extent that the value of the entity exceeds its net tangible assets.\n\nFurthermore, where the associated or subsidiary entity is subject to prudential regulation which requires the maintenance of minimum capital, (e.g. a financial institution or a health insurance institution), the Actuary must establish a further reserve to the extent that the net tangible assets of the entity are required to meet that capital requirement in the jurisdiction in which it operates and are not, therefore, available to support the life insurance company.\n\n4.1.4 Non-Realisable Intangible Assets\n\nThe Management Capital Requirement must provide a reserve equal to the value of any intangible assets held that are related to the business of the General Fund itself and are not independently realisable, for example deferred acquisition costs assets.\n\n4.1.5 Other Assets Not Measured at Fair Value\n\nA company must have assets of sufficient value as measured in the regulatory financial statements to satisfy the Management Capital Requirement. Where assets are not measured at fair value in the regulatory financial statements, and not otherwise treated as inadmissible assets, an allowance must be made for the uncertainty surrounding the behaviour of the value of the asset under adverse circumstances, relative to other assets that are measured at fair value. Such assets are not therefore to be included at a value greater than either their net tangible asset value or their fair value.\n\n4.1.6 Alignment to Net Market Value\n\nThe inadmissible assets reserve is to include the net difference between the value disclosed in the regulatory financial statements and the net realisable market value of all assets that are recorded in the financial statements at fair value and all financial liabilities of the General Fund.\n\n4.2 Resilience Reserve\n\n4.2.1 The resilience of the General Fund must be assessed and provision made for an appropriate reserve - the Resilience Reserve.\n\n4.2.2 Resilience is assessed as the ability of the General Fund to sustain shocks to the economic environment in which it operates and which are likely to result in an adverse movement in the value of assets relative to the value of the liabilities.\n\n4.2.3 The Resilience Reserve as determined under the prescribed rules of Section 10 is based on the impact of market changes on the position of a fund with a simple asset and liability profile. Where the fund is materially exposed to changes in investment market conditions that are not captured by the application of the prescribed rules, a corresponding additional provision must be made by the Actuary. The additional reserve must reflect the purpose and principles of the Standard. It must provide a level of reserving that is consistent with that applying under this Standard in respect of the changes in investment market conditions explicitly considered under this Standard. For this purpose, the Actuary may regard the prescribed requirements set out within this Standard, when applied to the asset and liability profile of a typical life office, as designed to provide a level of reserves which broadly meets the following requirements:\n\n1.  Able to cover adverse changes in investment market conditions that would be expected to arise once every 20 years;\n2.  Allowing a general time frame of 12 months in which the circumstances arise and the actions under (c) and (d) below follow;\n3.  The reserve required at the end of the period in (b) is able to be determined assuming that a matched asset and liability profile is achieved and that the Management Capital Requirement of this Standard is otherwise satisfied at, or after, that time; and\n4.  Allowance for management corrective action to achieve a matched asset and liability profile during the period in (b) is considered to be limited to highly reliable actions only, with conservative response time allowances.\n\n4.2.4 The criteria in paragraph 4.2.3 apply in respect of resilience risk only, independent of any other risks.\n\n4.3 Asset Exposure\n\n4.3.1 The actuary in assessing the asset risks:\n\n1.  must take account of the effective exposure of the General Fund to various asset classes, regardless of the physical asset holdings; and\n2.  must consider exposure to counterparty risks including, but not limited to, futures and options, swaps, hedges, warrants, forward rate and repurchase agreements; and\n3.  must take account of the underlying exposure of the General Fund to assets by adopting a “look through” approach in respect of each unlisted or controlled investment entity that represents more than 1% in value of the General Fund. For this purpose, an investment entity is an entity whose assets are solely investments, where the sole purpose of the entity is investment activities and where the investor investing in that entity has security directly linked to those assets; and\n4.  must, where investments covered by (c) are geared, treat the debt as if it were a liability of the life insurance company, with appropriate allowance made for the sensitivity of the underlying assets and liabilities to market movements; and\n5.  may adopt the ‘look through’ approach as set out in paragraphs (c) and (d) above where the investment is in a listed unit trust. Alternatively, the Actuary is required to treat the holding as a single investment in the equity investment class as defined in the General Standard; and\n6.  must assess the characteristics of the remaining admissible component of an investment where, following application of Section 9 of this Management Capital Standard, only part of the investment is admissible, by looking through to the underlying assets and liabilities where necessary and applying the Resilience Reserve requirements of Section 10 accordingly.\n\n4.3.2 As indicated in paragraph 4.2.3, the Resilience Reserve calculation assumes largely generic asset structures. Where the Actuary can demonstrate that an asset can be disaggregated into two or more identifiable sub-assets, the Actuary may treat the sub-assets separately and hence categorise them into different asset sectors according to their substance for the purpose of applying the Resilience Reserve requirements in Section 10, provided that it is demonstrated to APRA’s satisfaction that:\n\n1.  The substance of the sub-assets warrants their proposed asset sector categorisation;\n2.  The entire cash flows of the overall asset are fully reflected by the aggregated sub-assets;\n3.  The resilience parameters adopted appropriately reflect the substance of the sub-assets;\n4.  Where the sub-asset is equivalent in nature to an interest bearing security it is appropriately credit risk rated;\n5.  The resilience shocks applied to the sub-assets do not give a result in aggregate less than the prescribed shock for the overall asset under a scenario where all yields rise;\n6.  The diversification factor is not reduced (i.e. the diversification factor is to be calculated assuming that the asset is not disaggregated); and\n7.  The requirements of paragraphs 4.2.3 and 4.3.1 continue to be satisfied.\n\nSECTION 5 New Business Reserve\n\n5.1 The Management Capital Requirement must provide for any additional capital required to ensure that the General Fund will be able to meet its Solvency Requirement over the next three years, given;\n\n1.  levels of projected business over that period in accordance with the realistic business plans of the company; and\n2.  experience during that period in accordance with Best Estimate Assumptions.\n\n  \nPART B – METHODOLOGIES\n\nSECTION 6 Determination of the Management Capital Requirement\n\n6.1 The Management Capital Requirement for a life company is to be calculated as follows:\n\n(a) CALCULATE LIABILITY COMPONENT\n\nCalculate the Liability Component of the General Fund.\n\n(b) CALCULATE EXPENSE RESERVE\n\nIncrease the amount determined in (a) by the Expense Reserve.\n\n(c) ADD RESERVE FOR INADMISSIBLE ASSETS\n\nIncrease the amount determined in (b) by the reserve for Inadmissible Assets.\n\n(d) ADD RESILIENCE RESERVE\n\nDetermine the Admissible Assets of the General Fund, and on the basis of these assets, increase the amount determined in (c) by the Resilience Reserve.\n\nThe amount determined in (d) is referred to as the Solvency Requirement of the General Fund.\n\n(e) ADD NEW BUSINESS RESERVE\n\nIncrease the Solvency Requirement by any additional capital requirements for new business in respect of the General Fund.\n\n(f) TRANSITIONAL ADJUSTMENT\n\nFor the General Fund determine the amount of any transitional adjustment required to the Management Capital Requirement and deduct it from the amount determined in (e).\n\nThe overall calculation methodology involves systematically considering the values and risks underlying the reported values set out in the regulatory financial statements and assessing appropriate reserving adjustments or margins for each. The methodology requires that all such reserving adjustments are allowed for by means of increases to the Management Capital Requirement rather than decreases in the value of the assets against which the Management Capital Requirement is compared.\n\n6.2 The performance of each subsequent step in the calculation process described in paragraph 6.1 must not reduce the progressive result from its amount at the completion of the previous step, with the exception of step 6.1(f).\n\nSECTION 7 The Liability Component\n\n7.1 The Liability Component is determined as the realistic value of liabilities of the General Fund plus, in the case of a friendly society, the reserve in respect of servicing expenses and investment-linked business.\n\n7.2 Servicing Expense Reserve for a Friendly Society\n\n7.2.1 The reserve in respect of servicing expenses arises where there is a deficiency between expected management fees to be received from the benefit funds and expected servicing expenses.\n\n7.2.2 The reserve is to be determined, by the Actuary, as three times the deficiency expected to arise over the twelve months subsequent to the valuation date, with no adjustment for tax relief, between expected management fees in that period and expected servicing expenses.\n\n7.2.3 Expected servicing expenses are to be determined for this purpose as the greater of:\n\n1.  the actual servicing expenses in the twelve months prior to the valuation date increased by a margin of 2.5%; and\n2.  the expected servicing expenses in the twelve months subsequent to the valuation date increased by a margin of 2.5%.\n\n7.2.4 Where an allocation of the expenses of the General Fund relating to life insurance activities into Expense Categories is not undertaken by a friendly society, servicing expenses are to be taken as 50% of the total expenses related to the life insurance business.\n\n7.2.5 Where the entity, or associated entity, is the employer sponsor of a defined benefit superannuation fund, and a surplus exists in the fund which is being utilised to reduce contributions to the fund, consideration needs to be given, when determining the expected servicing costs, to the extent to which that contribution reduction would continue in the context of the scenario being considered.\n\n7.3 Investment-Linked Business\n\n7.3.1 In the case of a friendly society where investment-linked business is undertaken in one or more of the benefit funds, the Liability Component must include a reserve determined as 0.25% of the greater of:\n\n1.  the Solvency Liability in respect of that investment-linked business; and\n2.  the Minimum Termination Value in respect of that investment-linked business;\n\nas determined in accordance with the Solvency Standard.\n\nSECTION 8 Expense Reserve\n\n8.1 The Expense Reserve is determined as:\n\nM x Run-Off Expenses\n\nplus\n\nOffset Statutory Capital\n\n8.2 The multiple ‘M’ is the net of tax multiple based on a gross multiple of 1 adjusted for the tax deductibility of expenses only to the extent that a tax deduction would reasonably be expected to be realised on ceasing business.\n\n8.3 Run-off expenses, for this purpose, is to be determined by reference to the total actual expenses of the General Fund for the 12 months prior to the valuation:\n\n1.  in the case of expenses related to life insurance business, the run-off expenses is total actual acquisition expenses less the variable expenses included in that amount; and\n2.  otherwise, the run-off expenses is total actual expenses less the variable expenses included in that amount.  \n    \n\n8.4 For the purposes of paragraph 8.3, run-off expenses are not taken to include interest expenses on debt that is associated with the holding of assets in the General Fund.\n\n8.5 In the case of a friendly society, where an allocation of the expenses of the General Fund relating to life insurance activities into Expense Categories is not undertaken, acquisition expenses must be taken as 50% of the total expenses related to the life insurance business.\n\n8.6 Variable expenses, for the purposes of paragraph 8.3, are to be determined as those expenses otherwise included in run-off expenses to the extent it can be demonstrated that the expenses are not contracted, are abnormal, are easily eliminated or are sufficiently matched to income. Examples of variable expenses that relate to life insurance business may include commission, advertising costs and direct marketing expenses.\n\n8.7 In the case of business other than life insurance business, for the purposes of subparagraph 8.3(b), examples of expenses that may appropriately be regarded as variable expenses include:\n\n1.  all expenses directly and wholly attributable to, and half of the overhead expenses attributable to, health insurance business;\n2.  all expenses directly and wholly attributable to, and half of the overhead expenses attributable to, general insurance business;\n3.  retirement village expenses which are well matched with income both in timing and flexibility to vary.\n\n8.8 Offset Statutory Capital will not apply in the case of a friendly society or an eligible foreign life insurance company. In the case of other life companies, it is determined as the amount of Statutory Capital which has been utilised by the company in meeting the total (across all statutory funds) expense reserve requirements of the company under the Solvency Standard.\n\n8.9 The determination of the Expense Reserve may require an allocation of the total expenses of the General Fund as between different business activities or expense types. Any such allocation adopted must be one regarded as reasonable in the opinion of the auditor and Actuary of the company.\n\n8.10 The Expense Reserve must not be less than zero.\n\nSECTION 9 The Inadmissible Assets Reserve\n\n9.1 The Inadmissible Assets Reserve is determined as the sum of:\n\n1.  the reserve prescribed in respect of assets used in the conduct of business;\n2.  the reserve prescribed in respect of holdings in associated and subsidiary entities which are Financial Services entities;\n3.  non-realisable (in the context of the scenarios of adverse experience) intangible assets;\n4.  other assets not measured at fair value in the regulatory financial statements; and\n5.  the alignment necessary to ensure the remaining assets and the other liabilities are based on net market value.\n\n9.2 Assets Used in the Conduct of Business\n\n9.2.1 The prescribed reserve for assets used in the conduct of business is determined as the amount by which the stated value of the asset in the financial statements of the General Fund exceeds the value the asset would have in a run-off situation.\n\n9.2.2 For the purposes of paragraph 9.2.1, the conduct of business in the General Fund does not include holding of assets and associated debt.\n\n9.2.3 For the purpose of paragraph 9.2.1, the value to be ascribed to certain assets is subject to the following specific requirements:\n\n1.  Loans to Directors, Employees, Advisers and Related Parties\n\nIn respect of money loaned or advanced on an unsecured basis, no value is to be ascribed to the debt.\n\nIn respect of money loaned or advanced on a secured basis, the value to be ascribed to the debt must not exceed the amount of the security.\n\n1.  Equipment, (incl. Computer Software)\n\nThe value of equipment (incl. computer software) owned by the company must not exceed the known resale value of that asset. If the resale value is not known, then a zero value must be assumed.\n\n1.  Future Income Tax Benefits\n\nThe value of a future income tax benefit due to the company must not exceed the value of any income tax benefit that would accrue and be realised on ceasing business.\n\n1.  Defined Benefit Superannuation Fund Surpluses\n\nWhere the entity is an employer sponsor of a defined benefit superannuation fund, no value is to be ascribed to any surplus of that fund which might otherwise be recognised as an asset of the General Fund.\n\n1.  Holdings in Associated and Subsidiary Entities Other Than Financial Services Entities\n\nWhere the operations of an associated or subsidiary entity that is not a Financial Services entity are wholly dependent on those of the life insurance company, or the entity is itself an operational entity of the group to which the life insurance company belongs and is wholly dependant on the group, then the value ascribed to the entity must not exceed its net tangible assets.\n\nOtherwise, to the extent that such an entity has a degree of financial or operational independence from the life insurance company that could lead to it having some value in excess of net tangible assets under adverse circumstances affecting the life company, such additional value may be admissible. The admissible amount must only reflect the likely realisation value of the entity in the scenario contemplated, taking into account the likely circumstances of the sale (eg perception of a forced sale, capacity to separately sell entity, and anticipated supply/demand for such entities).\n\nThe value ascribed to such an entity that is financially and operationally independent of the life insurance company must not exceed the value in the regulatory financial statements.\n\nIn any case, the value ascribed to the entity need not be less than zero, provided that there is no recourse to the life company in relation to the entity’s obligations.\n\nHoldings in Associated and Subsidiary Financial Services Entities\n\n9.3 The prescribed reserve in respect of holdings in associated and subsidiary entities that are Financial Services entities is to be determined by the Actuary as the amount by which the value of the entity in the regulatory financial statements exceeds its net tangible assets. This reserve is to be further increased by the amount of any prudential capital requirements of the entity in the jurisdiction in which it operates. The total reserve required need not be more than the value of the entity in the regulatory financial statements, provided that there is no recourse to the life company in relation to the entity’s obligations.\n\nRetirement Villages\n\n9.4 In determining the Management Capital Requirement in the case of a friendly society, an inadmissible asset is to be established in relation to a retirement village, to the extent the net value of that asset on the balance sheet exceeds the fair value of the asset determined by the Actuary.\n\nIntangible Assets\n\n9.5 The regulatory financial statements of the General Fund may include intangible assets such as deferred acquisition cost assets, deferred origination cost assets, the value of in-force business and any goodwill asset. Where the values of such assets are not realisable independent of the business in-force, such assets are to be treated as inadmissible.\n\nAssets Not at Fair Value\n\n9.6 For the purpose of this Standard, the value ascribed to assets that are not measured at fair value in the regulatory financial statements, and not otherwise treated as inadmissible assets, must not exceed either their net tangible asset value or their fair value.\n\n9.7 Alignment to Net Market Value\n\n9.7.1 The inadmissible assets reserve is to include the net difference between the value disclosed in the regulatory financial statements and the net realisable market value (irrespective of whether this difference is positive or negative) of all assets that are recorded in the financial statements at fair value and of all financial liabilities of the General Fund. Net realisable market value means the mid market value (or equivalent estimated fair value) less (plus for liabilities) any marginal transaction costs that would be incurred on realisation.\n\n9.7.2 This adjustment is not required in respect of assets already deemed inadmissible under this Standard.\n\nAsset Concentration and Liquidity\n\n9.8 Notwithstanding the above requirements, if in the opinion of the Actuary the overall portfolio of admissible assets of the General Fund (when considered within the overall context of the business of the company and the requirements of this Standard) has too little diversification, is too illiquid and or has too great an exposure to obligors of low credit standing, the Actuary must add an amount considered appropriate to the reserve for inadmissible assets.\n\nSECTION 10 The Resilience Reserve\n\n10.1 The Resilience Reserve is determined as the additional amount that needs to be held before the happening of a prescribed set of changes in the economic environment, such that after the changes the admissible assets of the General Fund are able to meet the liabilities of the General Fund, including the assessed liability risks in accordance with this Standard.\n\n10.2 The Resilience Reserve is determined by reference to the Admissible Assets of the General Fund. It is not necessary to hold resilience reserves for that part of an asset which is inadmissible nor the free assets (in excess of the Management Capital Requirement) of the fund. It is not permitted to hypothecate assets to particular liabilities of the fund.\n\n10.3 The Resilience Reserve allows explicitly for the beneficial implications for asset risks of diversification across asset sectors.\n\n10.4 Determination of Resilience Reserve\n\n10.4.1 The Resilience Reserve is determined in accordance with the following formulae:\n\nResilience Reserve, determined as:\n\nL + RR \\= L’ x 1/f\n\nwhere\n\nRR \\= resilience reserve\n\nL \\= the liability held for the purposes of this standard to reflect all liability risks (including the Expense Reserve i.e. as at step 6.1(b)) prior to the prescribed change in economic environment and asset values\n\nL’ \\= value of that liability after the prescribed change\n\nf \\= A” / A\n\nA \\= value of admissible assets of the General Fund prior to the prescribed change\n\nA’ \\= value of those assets at the Adjusted Yield.\n\nA” \\= adjusted value of assets (A’) further reduced by the sum of the Adverse Exchange Movement factor and the Credit Risk Default Factors.\n\n  \n\nAdjusted Yield determined as:\n\nCurrent Yield + Credit Risk Yield Movement\n\n\\+ DF x Prescribed Yield Change\n\nwhere\n\nDF = { (E2 + P2 \\+ F2 + I2) } / (E+ P \\+ F+ I)\n\nunless application of the diversification factor in determining the Adjusted Yield for a given asset sector would have the effect of increasing the overall resilience reserve, in which case the Actuary may adopt\n\nDF = 1\n\nfor that asset sector for all scenarios.\n\nwhere\n\nDF \\= the diversification factor\n\nE, P the proportionate holding of assets in the asset sectors Equities and Property respectively each multiplied by the factor for that sector:\n\n(Prescribed Increase in Yield / Current Yield)\n\nF, I the proportionate holding of assets in the asset sectors Interest Bearing and Indexed Bonds respectively each multiplied by the factor for that sector:\n\n (Asset Value at Current Yield / Asset Value at Yield after prescribed increase) - 1\n\nNote 1\\. DF is determined in the scenario of a prescribed increase in yields across all sectors, and is used to determine the Adjusted Yield in that and all other scenarios.\n\n2\\. In determining F, cash is included in the interest bearing sector.\n\n10.4.2 While for the determination of A’ the most adverse scenario must be assumed, in determining the diversification factor the dynamics of that formula require that an increase in yields across all sectors be used (regardless of the fact that in certain circumstances this may not reflect the most adverse scenario).\n\n10.4.3 The Resilience Reserve must not be less than zero.\n\n10.5 Prescribed Yield Change\n\n10.5.1 Subject to paragraph 10.5.2, the prescribed changes to the economic environment are movements, up or down, in yields as per the table below, which reflect corresponding movements in the value of instruments within those respective sectors:\n\n| INVESTMENT SECTOR | PRESCRIBED YIELD CHANGE%                                                                       |\n| ----------------- | ---------------------------------------------------------------------------------------------- |\n| Equities          | + or - 1.25                                                                                    |\n| Property          | + or - 1.25                                                                                    |\n| Interest Bearing  | + or - 1.75 (subject to 10.5.2)                                                                |\n| Indexed Bonds     | + or - 0.60                                                                                    |\n| CURRENCY          | ADVERSE EXCHANGE MOVEMENT                                                                      |\n| All               | 10% reduction in value of assets exposed to a denomination other than that of the liabilities. |\n\n10.5.2 The prescribed reduction (but not increase) in yield for the Interest Bearing investment sector must not exceed 20% of the current Mid Swap Rate.\n\n10.5.3 Yield, as referred to in this Section 10, is determined in respect of the holdings of the General Fund and is to be taken to mean:\n\n1.  for Equities, dividend yield based on the dividend yield under the ASX200 Index as at the valuation date, unless the Actuary justifies otherwise;\n2.  for Property, rental yield, based on most recent leases in force and determined net of expenses;\n3.  for Interest Bearing Securities, redemption yield (running yield in the case of irredeemable securities); and\n4.  for Indexed Bonds, real yield.\n\n  \n\n10.6 Credit Risk\n\n10.6.1 An addition to the resilience reserves is to be made for credit risk in respect of interest bearing and indexed bond assets, including cash deposits and floating rate assets. This will be achieved by a reduction in the value of assets under the relevant adverse scenario. The change will not affect the value of liabilities.\n\n10.6.2 In calculating A”:\n\n1.  The applicable Credit Risk Yield Movement from the table below is first included in the Adjusted Yield as determined in paragraph 10.4.1 to determine A’. The duration used for this purpose may differ from that used to determine sensitivity to interest rate shocks (e.g. floating rate instruments not immediately redeemable may be regarded as dead short for the application of the prescribed yield change, but may have a longer term for the credit risk yield movement, depending on the extent to which credit risk deterioration can be mitigated).\n2.  Each of the values determined in a) above (i.e. A’) is then reduced by the sum of the applicable Credit Risk Default Factor taken from the table below and the Adverse Exchange Movement factor from the table in paragraph 10.5.1.\n\n```html\n<table cellspacing=\"0\" cellpadding=\"0\" style=\"margin-left:84.3pt; border:1.5pt solid #000000; border-collapse:collapse\"><tbody><tr><td colspan=\"3\" style=\"width:292.9pt; border-bottom:1.5pt solid #000000; padding-right:4.65pt; padding-left:4.65pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">Credit factors to apply to fixed interest and cash investments</span></p></td></tr><tr><td style=\"width:79.2pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:4.65pt; vertical-align:top\"><p><span style=\"font-weight:bold\">Counterparty Grade</span></p></td><td style=\"width:88.2pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">Credit Risk Default Factor</span></p></td><td style=\"width:103.9pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:4.65pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">Credit Risk Yield Movement</span></p></td></tr><tr><td style=\"width:79.2pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:4.65pt; vertical-align:top\"><p><span style=\"font-weight:bold\">1 (OECD government)</span></p></td><td style=\"width:88.2pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\"></span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">0.00%</span></p></td><td style=\"width:103.9pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:4.65pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\"></span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">0.0%</span></p></td></tr><tr><td style=\"width:79.2pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:4.65pt; vertical-align:top\"><p><span style=\"font-weight:bold\">1 (other)</span></p></td><td style=\"width:88.2pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\"></span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">0.00%</span></p></td><td style=\"width:103.9pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:4.65pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\"></span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">0.20%</span></p></td></tr><tr><td style=\"width:79.2pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:4.65pt; vertical-align:top\"><p><span style=\"font-weight:bold\">2</span></p></td><td style=\"width:88.2pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">0.00%</span></p></td><td style=\"width:103.9pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:4.65pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">0.30%</span></p></td></tr><tr><td style=\"width:79.2pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:4.65pt; vertical-align:top\"><p><span style=\"font-weight:bold\">3</span></p></td><td style=\"width:88.2pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">0.00%</span></p></td><td style=\"width:103.9pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:4.65pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">0.40%</span></p></td></tr><tr><td style=\"width:79.2pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:4.65pt; vertical-align:top\"><p><span style=\"font-weight:bold\">4</span></p></td><td style=\"width:88.2pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">0.75%</span></p></td><td style=\"width:103.9pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:4.65pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">0.60%</span></p></td></tr><tr><td style=\"width:79.2pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:4.65pt; vertical-align:top\"><p><span style=\"font-weight:bold\">5</span></p></td><td style=\"width:88.2pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">2.00%</span></p></td><td style=\"width:103.9pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:4.65pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">0.80%</span></p></td></tr><tr><td style=\"width:79.2pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:4.65pt; vertical-align:top\"><p><span style=\"font-weight:bold\">6</span></p></td><td style=\"width:88.2pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">6.25%</span></p></td><td style=\"width:103.9pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:4.65pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">0.90%</span></p></td></tr><tr><td style=\"width:79.2pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:4.65pt; vertical-align:top\"><p><span style=\"font-weight:bold\">7</span></p></td><td style=\"width:88.2pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">9.75%</span></p></td><td style=\"width:103.9pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:4.65pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">0.90%</span></p></td></tr><tr><td colspan=\"3\" style=\"width:292.9pt; border-top:0.75pt solid #000000; padding-right:4.65pt; padding-left:4.65pt; vertical-align:top\"><p><span></span></p></td></tr></tbody></table>\n```\n\n10.6.3 In calculating the Adjusted Yield under paragraph 10.4.1 the Credit Risk Yield Movement is always positive, even though the Prescribed Yield Change may be positive or negative, depending on the relevant adverse scenario being tested.\n\n  \n\n10.7 Determination of L’\n\n10.7.1 In determining the change to the discount rate for valuing the liabilities, it is the Prescribed Yield Change for the interest bearing investment sector determined under paragraphs 10.5.1 and 10.5.2 which is relevant. The Adjusted Yield as defined in paragraph 10.4.1 (including diversification and credit risk adjustments) is relevant only for asset values.\n\n10.7.2 In determining the Resilience Reserve required, other assets and liabilities whose value is dependent on the value of investment assets, such as tax assets and liabilities, must be adjusted in a manner consistent with the action the company would take were asset values to change by the prescribed amount. However, in scenarios where asset values are assumed to fall, any resulting tax benefit may only be taken into account to the extent that the Actuary is satisfied that the tax benefit would actually be realised on the company ceasing business.\n\n10.7.3 In calculating L’ no adjustment is required for any potential impact that the Prescribed Yield Change would have on the value of a deficit held in respect of a defined benefit superannuation fund for which the entity, or an associated entity, is an employer sponsor.\n\n10.7.4 The resilience reserve in respect of a retirement village is to be determined, by the Actuary, by reference to the value on a discounted cash flow basis.\n\n10.8 Application of Prescribed Yield Changes\n\n10.8.1 In applying the prescribed yield changes of paragraph 10.5 to the determination of A’ and L’, the Actuary must address the worst combination of rising or falling yields for the different asset sectors to which the business is realistically exposed. At the very least, the following two scenarios must be tested:\n\n1.  rising fixed interest yields (investment categories Interest Bearing and Indexed Bonds) and rising equity/property yields (investment categories Equities and Property), and\n2.  falling fixed interest yields (investment categories Interest Bearing and Indexed Bonds) and rising equity/property yields (investment categories Equities and Property).\n\nWhere the circumstances of the fund are such that other scenarios are potentially relevant then they must also be tested.\n\n  \n\n10.9 Other Asset Exposures\n\n10.9.1 Paragraph 4.2.3 outlines the principles to be followed where the fund is materially exposed to changes in investment market conditions that are not captured by the application of the prescribed rules of this section, and where a corresponding additional provision must be made. In this regard, the Actuary needs to consider the impact on the fund of significant adverse changes in investment markets such as:\n\n1.  changes in the slope and shape of the yield curve, especially those that can give rise to difficulties with the reinvestment of assets backing long term liabilities; and\n2.  changes in yield, volatility and correlation parameters that would be reflected in the fair value of derivative assets or liabilities.\n\n10.9.2 The Actuary must also consider whether the impact of credit risk is adequately provided for through the prescribed credit risk adjustments of paragraph 10.6 noting that the prescribed credit risk adjustments presume that the asset portfolio is highly diversified. If credit risks are not adequately provided for, for example because of a lack of diversification, the Actuary is to employ other additional reserving requirements.\n\nSECTION 11 New Business Reserve\n\n11.1 The New Business Reserve is determined as;\n\na) the additional amount required to ensure that the Solvency Requirement of the General Fund (refer paragraph 6(1)(e)) will continue to be met over the next three years, allowing for capital and profit emerging over that period from the existing business of the fund;\n\nless\n\nb) the New Business Capital\n\nplus\n\nc) the Offset Statutory Capital.\n\n11.2 New business capital is represented by existing, binding arrangements for the external raising of capital specific to the financing of new business within the General Fund.\n\n#### 11.3 Offset Statutory Capital will not apply in the case of a friendly society or an eligible foreign life insurance company. In the case of other life companies, it is determined as the amount of Statutory Capital which has been utilised by the company in meeting the total (across all statutory funds) new business reserve requirements of the company under the Capital Adequacy Standard.\n\n#### 11.4 The New Business Reserve must not be less than zero.\n\nSECTION 12 Transitional Arrangements\n\nOverview\n\nThe Management Capital Requirement determined in accordance with this Management Capital Standard AS 6.03 may be significantly different from the equivalent amount determined in accordance with the previous version AS 6.02. To allow life companies that are significantly affected sufficient time to implement any necessary changes for either reducing the Management Capital Requirement or increasing the amount of assets in the General Fund to cover the new Management Capital Requirement it is appropriate to allow some short term transitional arrangements.\n\nThese transitional arrangements will be in the form of a reduction to the amount of the Management Capital Requirement, such reduction reducing to zero over the transitional period.\n\n12.1 Where, at the date of introduction of this Standard, the amount of the Management Capital Requirement determined prior to allowing for any Transitional Adjustment (i.e. after step 6.1(e)) exceeds the Management Capital Requirement that would have resulted at the same date from application of the previous version of this standard (AS 6.02) by an amount exceeding the Transitional Materiality Limit, the Actuary may, with APRA’s agreement, apply a Transitional Adjustment to the Management Capital Requirement in accordance with the provisions of this section.\n\n12.2 The Transitional Adjustment is determined at the date of calculation as:\n\n(MCR – MCR’) x t / n\n\n  \nwhere\n\nMCR \\= the Management Capital Requirement determined prior to allowing for any Transitional Adjustment (i.e. after step 6.1(e)) as at the date of calculation\n\nMCR’ \\= the Management Capital Requirement that would have resulted at the same date from application of the previous version of this standard (AS 6.02)\n\nt \\= the period from the calculation date to the Transition End Date\n\nn \\= the period from application date of this Management Capital Standard to the Transition End Date.\n\nSECTION 13 Materiality\n\nOverview\n\nParticular values or components are considered material to the overall result of a calculation when their mis-statement or omission would cause that result to be misleading to the users of the information.\n\nMateriality tests assess the significance of the particular value/component by relating it to the amount of the overall result to which it contributes.\n\n13.1 The Management Capital Requirement determined in accordance with this Standard is subject to materiality standards applied at the General Fund level.\n\n13.2 The base amount for materiality purposes is the difference between the assets of the General Fund and the Management Capital Requirement of that fund.\n\n13.3 In applying the materiality standards described in paragraphs 13.1 and 13.2:\n\n1.  it is appropriate to use as the base amount for materiality purposes a rolling average of the base amount provided that the average so derived is a function of not less than three and not more than five years experience and is reflective of the current and anticipated future experience; and\n2.  it is appropriate, as the base amount approaches zero, for alternative key indicators to be used in establishing materiality.\n\n13.4 While assessing materiality will always be a matter of professional judgement, the following quantitative thresholds are generally to be used:\n\n1.  variations in amounts of 10% or more of the base amount may be presumed material; and\n2.  variations in amounts of 5% or less of the base amount may be presumed immaterial.\n\n  \nPART C – ACTUARY’S STATEMENT\n\nSECTION 14 Statement Relating to the Determination\n\n14.1 In respect of any determination of the Management Capital Requirement the Actuary must provide in the investigation report required by section 113 or 115 of the Act, details of the calculation processes and the assumptions used in deriving the results.","sortOrder":24},{"sectionNumber":"b) the additional risks that may be born","sectionType":"subdivision","heading":"b) the additional risks that may be borne by the General Fund arising from investment-linked business in the statutory funds.","content":"#### b) the additional risks that may be borne by the General Fund arising from investment-linked business in the statutory funds.\n\n3.2.3 The bases for determining the reserves described in paragraph 3.2.2 are prescribed (see section 7).\n\nExpense Reserve\n\n3.3 The Management Capital Requirement must provide for capital to be held against the risk of an overrun in the expenses of the General Fund in the particular circumstance of a run-off of the business activities of that fund.\n\nOther Liabilities\n\n3.4 Where the other liabilities of the General Fund (other than a deficit in respect of a defined benefit superannuation fund to which the entity, or an associated entity, is an employer sponsor) are determined based on estimates of future cash flows, these must be reassessed and discounted to the valuation date, on a basis consistent with the overall scenarios of adverse experience being considered (per Section 2).\n\n3.5 Where the entity, or an associated entity, is an employer sponsor of a defined benefit superannuation fund and the other liabilities of the General Fund include a deficit in respect of that fund, and the deficit has been determined using the corridor approach as defined under accounting standard AASB 119 Employee Benefits, the deficit is to be reduced (increased) by the amount of any Unrecognised Actuarial Gains (losses).\n\nSECTION 4 Asset Risks\n\nOverview\n\nThe risks associated with the assets supporting the liabilities are discussed below.\n\nAdverse Market Movements\n\nTo the extent that the value of liabilities is not directly linked to the value of the underlying assets, an adverse movement in the value of the assets effectively reduces the level of reserves supporting the liabilities. It is prudent that a company recognise this risk and hold sufficient capital such that the liabilities would still be able to be met following an adverse market movement.\n\nThe risk of adverse market movements is one of many potentially offsetting risks. It is presumed that, for the asset and liability profile of a typical life insurer, a Resilience Reserve set at the level of sufficiency described in section 4.2 will, with additional reserves determined independently in respect of other risks, produce an overall Management Capital Requirement at the level of sufficiency described in paragraph 2.6.\n\nAsset Liquidation\n\nCertain assets are disclosed in the regulatory financial statements at a value which may be dependent on the ongoing operation of the business. On the cessation of business, the value of those assets would likely be less. Capital is held against that part of the value of such assets which would not be realisable in the adverse circumstance of a wind-down of business.\n\nHoldings in Associated and Subsidiary Financial Services Entities\n\nAssociated and subsidiary Financial Services entities may be exposed to essentially the same environmental and systemic risks as the life insurer. The value of such an entity in excess of its net tangible assets cannot therefore be relied upon to meet the capital requirements of the life insurance company under adverse circumstances. Furthermore, the value taken for such a holding is not to double count any legislated capital requirement of the entity itself.\n\nCredit Risks\n\nIn general, it is considered that the combined effect of adopting the net market value of the assets and the reserves for asset concentration would address the average costs of default and marketability/liquidity risks.\n\nWhere a fund has significant exposure to non-sovereign credit risks the Actuary is to provide an appropriate reserve allowance for such credit risks, along with any other asset risks.\n\nLiquidity Risks\n\nThe Actuary’s general responsibility in assessing and advising management on the financial operations of the company would include consideration of liquidity risks.\n\nOverall Asset Risks\n\nNotwithstanding the prescribed limits of this Standard, the Actuary must have regard to the particular circumstances of the company. If in the opinion of the Actuary the overall portfolio of admissible assets of the General Fund has too little diversification, is too illiquid or has too great an exposure to one obligor of low credit standing, the Actuary must increase the reserves appropriately.\n\nFurthermore, the asset and other liabilities values disclosed in the regulatory financial statements may not be equal to the net market value of those assets and other liabilities, allowing for realisation costs. A reserve for the difference between the reported and net realisable market value of the assets and other liabilities is to be included.\n\nNote\n\nIt is not the intention of these reserves to limit the investment practices of life companies. Rather it is to ensure that the risks associated with particular investment strategies are appropriately assessed and provided for.\n\n4.1 Reserve for Inadmissible Assets\n\n4.1.1 The Management Capital Requirement must provide an amount of capital to be held - the Inadmissible Assets Reserve - in respect of:\n\n1.  an asset which has a value that is dependent upon the continuation of the business;\n2.  holdings in an associated or subsidiary entity which is a Financial Services entity;\n3.  non-realisable (in the context of the scenarios of adverse experience) intangible assets;\n4.  other assets not measured at fair value in the regulatory financial statements; and\n5.  alignment necessary to ensure the remaining assets and the other liabilities are based on net market value.\n\n4.1.2 Assets Used for The Conduct of Business\n\nThe Inadmissible Assets Reserve must provide for the risk that, in the context of the run-off of the business of the General Fund, the value of the asset differs from the value disclosed in the regulatory financial statements.\n\n4.1.3 Holdings in Associated and Subsidiary Entities which are Financial Services Entities\n\nWhere the associated or subsidiary entity is a Financial Services entity the Actuary must establish a reserve to the extent that the value of the entity exceeds its net tangible assets.\n\nFurthermore, where the associated or subsidiary entity is subject to prudential regulation which requires the maintenance of minimum capital, (e.g. a financial institution or a health insurance institution), the Actuary must establish a further reserve to the extent that the net tangible assets of the entity are required to meet that capital requirement in the jurisdiction in which it operates and are not, therefore, available to support the life insurance company.\n\n4.1.4 Non-Realisable Intangible Assets\n\nThe Management Capital Requirement must provide a reserve equal to the value of any intangible assets held that are related to the business of the General Fund itself and are not independently realisable, for example deferred acquisition costs assets.\n\n4.1.5 Other Assets Not Measured at Fair Value\n\nA company must have assets of sufficient value as measured in the regulatory financial statements to satisfy the Management Capital Requirement. Where assets are not measured at fair value in the regulatory financial statements, and not otherwise treated as inadmissible assets, an allowance must be made for the uncertainty surrounding the behaviour of the value of the asset under adverse circumstances, relative to other assets that are measured at fair value. Such assets are not therefore to be included at a value greater than either their net tangible asset value or their fair value.\n\n4.1.6 Alignment to Net Market Value\n\nThe inadmissible assets reserve is to include the net difference between the value disclosed in the regulatory financial statements and the net realisable market value of all assets that are recorded in the financial statements at fair value and all financial liabilities of the General Fund.\n\n4.2 Resilience Reserve\n\n4.2.1 The resilience of the General Fund must be assessed and provision made for an appropriate reserve - the Resilience Reserve.\n\n4.2.2 Resilience is assessed as the ability of the General Fund to sustain shocks to the economic environment in which it operates and which are likely to result in an adverse movement in the value of assets relative to the value of the liabilities.\n\n4.2.3 The Resilience Reserve as determined under the prescribed rules of Section 10 is based on the impact of market changes on the position of a fund with a simple asset and liability profile. Where the fund is materially exposed to changes in investment market conditions that are not captured by the application of the prescribed rules, a corresponding additional provision must be made by the Actuary. The additional reserve must reflect the purpose and principles of the Standard. It must provide a level of reserving that is consistent with that applying under this Standard in respect of the changes in investment market conditions explicitly considered under this Standard. For this purpose, the Actuary may regard the prescribed requirements set out within this Standard, when applied to the asset and liability profile of a typical life office, as designed to provide a level of reserves which broadly meets the following requirements:\n\n1.  Able to cover adverse changes in investment market conditions that would be expected to arise once every 20 years;\n2.  Allowing a general time frame of 12 months in which the circumstances arise and the actions under (c) and (d) below follow;\n3.  The reserve required at the end of the period in (b) is able to be determined assuming that a matched asset and liability profile is achieved and that the Management Capital Requirement of this Standard is otherwise satisfied at, or after, that time; and\n4.  Allowance for management corrective action to achieve a matched asset and liability profile during the period in (b) is considered to be limited to highly reliable actions only, with conservative response time allowances.\n\n4.2.4 The criteria in paragraph 4.2.3 apply in respect of resilience risk only, independent of any other risks.\n\n4.3 Asset Exposure\n\n4.3.1 The actuary in assessing the asset risks:\n\n1.  must take account of the effective exposure of the General Fund to various asset classes, regardless of the physical asset holdings; and\n2.  must consider exposure to counterparty risks including, but not limited to, futures and options, swaps, hedges, warrants, forward rate and repurchase agreements; and\n3.  must take account of the underlying exposure of the General Fund to assets by adopting a “look through” approach in respect of each unlisted or controlled investment entity that represents more than 1% in value of the General Fund. For this purpose, an investment entity is an entity whose assets are solely investments, where the sole purpose of the entity is investment activities and where the investor investing in that entity has security directly linked to those assets; and\n4.  must, where investments covered by (c) are geared, treat the debt as if it were a liability of the life insurance company, with appropriate allowance made for the sensitivity of the underlying assets and liabilities to market movements; and\n5.  may adopt the ‘look through’ approach as set out in paragraphs (c) and (d) above where the investment is in a listed unit trust. Alternatively, the Actuary is required to treat the holding as a single investment in the equity investment class as defined in the General Standard; and\n6.  must assess the characteristics of the remaining admissible component of an investment where, following application of Section 9 of this Management Capital Standard, only part of the investment is admissible, by looking through to the underlying assets and liabilities where necessary and applying the Resilience Reserve requirements of Section 10 accordingly.\n\n4.3.2 As indicated in paragraph 4.2.3, the Resilience Reserve calculation assumes largely generic asset structures. Where the Actuary can demonstrate that an asset can be disaggregated into two or more identifiable sub-assets, the Actuary may treat the sub-assets separately and hence categorise them into different asset sectors according to their substance for the purpose of applying the Resilience Reserve requirements in Section 10, provided that it is demonstrated to APRA’s satisfaction that:\n\n1.  The substance of the sub-assets warrants their proposed asset sector categorisation;\n2.  The entire cash flows of the overall asset are fully reflected by the aggregated sub-assets;\n3.  The resilience parameters adopted appropriately reflect the substance of the sub-assets;\n4.  Where the sub-asset is equivalent in nature to an interest bearing security it is appropriately credit risk rated;\n5.  The resilience shocks applied to the sub-assets do not give a result in aggregate less than the prescribed shock for the overall asset under a scenario where all yields rise;\n6.  The diversification factor is not reduced (i.e. the diversification factor is to be calculated assuming that the asset is not disaggregated); and\n7.  The requirements of paragraphs 4.2.3 and 4.3.1 continue to be satisfied.\n\nSECTION 5 New Business Reserve\n\n5.1 The Management Capital Requirement must provide for any additional capital required to ensure that the General Fund will be able to meet its Solvency Requirement over the next three years, given;\n\n1.  levels of projected business over that period in accordance with the realistic business plans of the company; and\n2.  experience during that period in accordance with Best Estimate Assumptions.\n\n  \nPART B – METHODOLOGIES\n\nSECTION 6 Determination of the Management Capital Requirement\n\n6.1 The Management Capital Requirement for a life company is to be calculated as follows:\n\n(a) CALCULATE LIABILITY COMPONENT\n\nCalculate the Liability Component of the General Fund.\n\n(b) CALCULATE EXPENSE RESERVE\n\nIncrease the amount determined in (a) by the Expense Reserve.\n\n(c) ADD RESERVE FOR INADMISSIBLE ASSETS\n\nIncrease the amount determined in (b) by the reserve for Inadmissible Assets.\n\n(d) ADD RESILIENCE RESERVE\n\nDetermine the Admissible Assets of the General Fund, and on the basis of these assets, increase the amount determined in (c) by the Resilience Reserve.\n\nThe amount determined in (d) is referred to as the Solvency Requirement of the General Fund.\n\n(e) ADD NEW BUSINESS RESERVE\n\nIncrease the Solvency Requirement by any additional capital requirements for new business in respect of the General Fund.\n\n(f) TRANSITIONAL ADJUSTMENT\n\nFor the General Fund determine the amount of any transitional adjustment required to the Management Capital Requirement and deduct it from the amount determined in (e).\n\nThe overall calculation methodology involves systematically considering the values and risks underlying the reported values set out in the regulatory financial statements and assessing appropriate reserving adjustments or margins for each. The methodology requires that all such reserving adjustments are allowed for by means of increases to the Management Capital Requirement rather than decreases in the value of the assets against which the Management Capital Requirement is compared.\n\n6.2 The performance of each subsequent step in the calculation process described in paragraph 6.1 must not reduce the progressive result from its amount at the completion of the previous step, with the exception of step 6.1(f).\n\nSECTION 7 The Liability Component\n\n7.1 The Liability Component is determined as the realistic value of liabilities of the General Fund plus, in the case of a friendly society, the reserve in respect of servicing expenses and investment-linked business.\n\n7.2 Servicing Expense Reserve for a Friendly Society\n\n7.2.1 The reserve in respect of servicing expenses arises where there is a deficiency between expected management fees to be received from the benefit funds and expected servicing expenses.\n\n7.2.2 The reserve is to be determined, by the Actuary, as three times the deficiency expected to arise over the twelve months subsequent to the valuation date, with no adjustment for tax relief, between expected management fees in that period and expected servicing expenses.\n\n7.2.3 Expected servicing expenses are to be determined for this purpose as the greater of:\n\n1.  the actual servicing expenses in the twelve months prior to the valuation date increased by a margin of 2.5%; and\n2.  the expected servicing expenses in the twelve months subsequent to the valuation date increased by a margin of 2.5%.\n\n7.2.4 Where an allocation of the expenses of the General Fund relating to life insurance activities into Expense Categories is not undertaken by a friendly society, servicing expenses are to be taken as 50% of the total expenses related to the life insurance business.\n\n7.2.5 Where the entity, or associated entity, is the employer sponsor of a defined benefit superannuation fund, and a surplus exists in the fund which is being utilised to reduce contributions to the fund, consideration needs to be given, when determining the expected servicing costs, to the extent to which that contribution reduction would continue in the context of the scenario being considered.\n\n7.3 Investment-Linked Business\n\n7.3.1 In the case of a friendly society where investment-linked business is undertaken in one or more of the benefit funds, the Liability Component must include a reserve determined as 0.25% of the greater of:\n\n1.  the Solvency Liability in respect of that investment-linked business; and\n2.  the Minimum Termination Value in respect of that investment-linked business;\n\nas determined in accordance with the Solvency Standard.\n\nSECTION 8 Expense Reserve\n\n8.1 The Expense Reserve is determined as:\n\nM x Run-Off Expenses\n\nplus\n\nOffset Statutory Capital\n\n8.2 The multiple ‘M’ is the net of tax multiple based on a gross multiple of 1 adjusted for the tax deductibility of expenses only to the extent that a tax deduction would reasonably be expected to be realised on ceasing business.\n\n8.3 Run-off expenses, for this purpose, is to be determined by reference to the total actual expenses of the General Fund for the 12 months prior to the valuation:\n\n1.  in the case of expenses related to life insurance business, the run-off expenses is total actual acquisition expenses less the variable expenses included in that amount; and\n2.  otherwise, the run-off expenses is total actual expenses less the variable expenses included in that amount.  \n    \n\n8.4 For the purposes of paragraph 8.3, run-off expenses are not taken to include interest expenses on debt that is associated with the holding of assets in the General Fund.\n\n8.5 In the case of a friendly society, where an allocation of the expenses of the General Fund relating to life insurance activities into Expense Categories is not undertaken, acquisition expenses must be taken as 50% of the total expenses related to the life insurance business.\n\n8.6 Variable expenses, for the purposes of paragraph 8.3, are to be determined as those expenses otherwise included in run-off expenses to the extent it can be demonstrated that the expenses are not contracted, are abnormal, are easily eliminated or are sufficiently matched to income. Examples of variable expenses that relate to life insurance business may include commission, advertising costs and direct marketing expenses.\n\n8.7 In the case of business other than life insurance business, for the purposes of subparagraph 8.3(b), examples of expenses that may appropriately be regarded as variable expenses include:\n\n1.  all expenses directly and wholly attributable to, and half of the overhead expenses attributable to, health insurance business;\n2.  all expenses directly and wholly attributable to, and half of the overhead expenses attributable to, general insurance business;\n3.  retirement village expenses which are well matched with income both in timing and flexibility to vary.\n\n8.8 Offset Statutory Capital will not apply in the case of a friendly society or an eligible foreign life insurance company. In the case of other life companies, it is determined as the amount of Statutory Capital which has been utilised by the company in meeting the total (across all statutory funds) expense reserve requirements of the company under the Solvency Standard.\n\n8.9 The determination of the Expense Reserve may require an allocation of the total expenses of the General Fund as between different business activities or expense types. Any such allocation adopted must be one regarded as reasonable in the opinion of the auditor and Actuary of the company.\n\n8.10 The Expense Reserve must not be less than zero.\n\nSECTION 9 The Inadmissible Assets Reserve\n\n9.1 The Inadmissible Assets Reserve is determined as the sum of:\n\n1.  the reserve prescribed in respect of assets used in the conduct of business;\n2.  the reserve prescribed in respect of holdings in associated and subsidiary entities which are Financial Services entities;\n3.  non-realisable (in the context of the scenarios of adverse experience) intangible assets;\n4.  other assets not measured at fair value in the regulatory financial statements; and\n5.  the alignment necessary to ensure the remaining assets and the other liabilities are based on net market value.\n\n9.2 Assets Used in the Conduct of Business\n\n9.2.1 The prescribed reserve for assets used in the conduct of business is determined as the amount by which the stated value of the asset in the financial statements of the General Fund exceeds the value the asset would have in a run-off situation.\n\n9.2.2 For the purposes of paragraph 9.2.1, the conduct of business in the General Fund does not include holding of assets and associated debt.\n\n9.2.3 For the purpose of paragraph 9.2.1, the value to be ascribed to certain assets is subject to the following specific requirements:\n\n1.  Loans to Directors, Employees, Advisers and Related Parties\n\nIn respect of money loaned or advanced on an unsecured basis, no value is to be ascribed to the debt.\n\nIn respect of money loaned or advanced on a secured basis, the value to be ascribed to the debt must not exceed the amount of the security.\n\n1.  Equipment, (incl. Computer Software)\n\nThe value of equipment (incl. computer software) owned by the company must not exceed the known resale value of that asset. If the resale value is not known, then a zero value must be assumed.\n\n1.  Future Income Tax Benefits\n\nThe value of a future income tax benefit due to the company must not exceed the value of any income tax benefit that would accrue and be realised on ceasing business.\n\n1.  Defined Benefit Superannuation Fund Surpluses\n\nWhere the entity is an employer sponsor of a defined benefit superannuation fund, no value is to be ascribed to any surplus of that fund which might otherwise be recognised as an asset of the General Fund.\n\n1.  Holdings in Associated and Subsidiary Entities Other Than Financial Services Entities\n\nWhere the operations of an associated or subsidiary entity that is not a Financial Services entity are wholly dependent on those of the life insurance company, or the entity is itself an operational entity of the group to which the life insurance company belongs and is wholly dependant on the group, then the value ascribed to the entity must not exceed its net tangible assets.\n\nOtherwise, to the extent that such an entity has a degree of financial or operational independence from the life insurance company that could lead to it having some value in excess of net tangible assets under adverse circumstances affecting the life company, such additional value may be admissible. The admissible amount must only reflect the likely realisation value of the entity in the scenario contemplated, taking into account the likely circumstances of the sale (eg perception of a forced sale, capacity to separately sell entity, and anticipated supply/demand for such entities).\n\nThe value ascribed to such an entity that is financially and operationally independent of the life insurance company must not exceed the value in the regulatory financial statements.\n\nIn any case, the value ascribed to the entity need not be less than zero, provided that there is no recourse to the life company in relation to the entity’s obligations.\n\nHoldings in Associated and Subsidiary Financial Services Entities\n\n9.3 The prescribed reserve in respect of holdings in associated and subsidiary entities that are Financial Services entities is to be determined by the Actuary as the amount by which the value of the entity in the regulatory financial statements exceeds its net tangible assets. This reserve is to be further increased by the amount of any prudential capital requirements of the entity in the jurisdiction in which it operates. The total reserve required need not be more than the value of the entity in the regulatory financial statements, provided that there is no recourse to the life company in relation to the entity’s obligations.\n\nRetirement Villages\n\n9.4 In determining the Management Capital Requirement in the case of a friendly society, an inadmissible asset is to be established in relation to a retirement village, to the extent the net value of that asset on the balance sheet exceeds the fair value of the asset determined by the Actuary.\n\nIntangible Assets\n\n9.5 The regulatory financial statements of the General Fund may include intangible assets such as deferred acquisition cost assets, deferred origination cost assets, the value of in-force business and any goodwill asset. Where the values of such assets are not realisable independent of the business in-force, such assets are to be treated as inadmissible.\n\nAssets Not at Fair Value\n\n9.6 For the purpose of this Standard, the value ascribed to assets that are not measured at fair value in the regulatory financial statements, and not otherwise treated as inadmissible assets, must not exceed either their net tangible asset value or their fair value.\n\n9.7 Alignment to Net Market Value\n\n9.7.1 The inadmissible assets reserve is to include the net difference between the value disclosed in the regulatory financial statements and the net realisable market value (irrespective of whether this difference is positive or negative) of all assets that are recorded in the financial statements at fair value and of all financial liabilities of the General Fund. Net realisable market value means the mid market value (or equivalent estimated fair value) less (plus for liabilities) any marginal transaction costs that would be incurred on realisation.\n\n9.7.2 This adjustment is not required in respect of assets already deemed inadmissible under this Standard.\n\nAsset Concentration and Liquidity\n\n9.8 Notwithstanding the above requirements, if in the opinion of the Actuary the overall portfolio of admissible assets of the General Fund (when considered within the overall context of the business of the company and the requirements of this Standard) has too little diversification, is too illiquid and or has too great an exposure to obligors of low credit standing, the Actuary must add an amount considered appropriate to the reserve for inadmissible assets.\n\nSECTION 10 The Resilience Reserve\n\n10.1 The Resilience Reserve is determined as the additional amount that needs to be held before the happening of a prescribed set of changes in the economic environment, such that after the changes the admissible assets of the General Fund are able to meet the liabilities of the General Fund, including the assessed liability risks in accordance with this Standard.\n\n10.2 The Resilience Reserve is determined by reference to the Admissible Assets of the General Fund. It is not necessary to hold resilience reserves for that part of an asset which is inadmissible nor the free assets (in excess of the Management Capital Requirement) of the fund. It is not permitted to hypothecate assets to particular liabilities of the fund.\n\n10.3 The Resilience Reserve allows explicitly for the beneficial implications for asset risks of diversification across asset sectors.\n\n10.4 Determination of Resilience Reserve\n\n10.4.1 The Resilience Reserve is determined in accordance with the following formulae:\n\nResilience Reserve, determined as:\n\nL + RR \\= L’ x 1/f\n\nwhere\n\nRR \\= resilience reserve\n\nL \\= the liability held for the purposes of this standard to reflect all liability risks (including the Expense Reserve i.e. as at step 6.1(b)) prior to the prescribed change in economic environment and asset values\n\nL’ \\= value of that liability after the prescribed change\n\nf \\= A” / A\n\nA \\= value of admissible assets of the General Fund prior to the prescribed change\n\nA’ \\= value of those assets at the Adjusted Yield.\n\nA” \\= adjusted value of assets (A’) further reduced by the sum of the Adverse Exchange Movement factor and the Credit Risk Default Factors.\n\n  \n\nAdjusted Yield determined as:\n\nCurrent Yield + Credit Risk Yield Movement\n\n\\+ DF x Prescribed Yield Change\n\nwhere\n\nDF = { (E2 + P2 \\+ F2 + I2) } / (E+ P \\+ F+ I)\n\nunless application of the diversification factor in determining the Adjusted Yield for a given asset sector would have the effect of increasing the overall resilience reserve, in which case the Actuary may adopt\n\nDF = 1\n\nfor that asset sector for all scenarios.\n\nwhere\n\nDF \\= the diversification factor\n\nE, P the proportionate holding of assets in the asset sectors Equities and Property respectively each multiplied by the factor for that sector:\n\n(Prescribed Increase in Yield / Current Yield)\n\nF, I the proportionate holding of assets in the asset sectors Interest Bearing and Indexed Bonds respectively each multiplied by the factor for that sector:\n\n (Asset Value at Current Yield / Asset Value at Yield after prescribed increase) - 1\n\nNote 1\\. DF is determined in the scenario of a prescribed increase in yields across all sectors, and is used to determine the Adjusted Yield in that and all other scenarios.\n\n2\\. In determining F, cash is included in the interest bearing sector.\n\n10.4.2 While for the determination of A’ the most adverse scenario must be assumed, in determining the diversification factor the dynamics of that formula require that an increase in yields across all sectors be used (regardless of the fact that in certain circumstances this may not reflect the most adverse scenario).\n\n10.4.3 The Resilience Reserve must not be less than zero.\n\n10.5 Prescribed Yield Change\n\n10.5.1 Subject to paragraph 10.5.2, the prescribed changes to the economic environment are movements, up or down, in yields as per the table below, which reflect corresponding movements in the value of instruments within those respective sectors:\n\n| INVESTMENT SECTOR | PRESCRIBED YIELD CHANGE%                                                                       |\n| ----------------- | ---------------------------------------------------------------------------------------------- |\n| Equities          | + or - 1.25                                                                                    |\n| Property          | + or - 1.25                                                                                    |\n| Interest Bearing  | + or - 1.75 (subject to 10.5.2)                                                                |\n| Indexed Bonds     | + or - 0.60                                                                                    |\n| CURRENCY          | ADVERSE EXCHANGE MOVEMENT                                                                      |\n| All               | 10% reduction in value of assets exposed to a denomination other than that of the liabilities. |\n\n10.5.2 The prescribed reduction (but not increase) in yield for the Interest Bearing investment sector must not exceed 20% of the current Mid Swap Rate.\n\n10.5.3 Yield, as referred to in this Section 10, is determined in respect of the holdings of the General Fund and is to be taken to mean:\n\n1.  for Equities, dividend yield based on the dividend yield under the ASX200 Index as at the valuation date, unless the Actuary justifies otherwise;\n2.  for Property, rental yield, based on most recent leases in force and determined net of expenses;\n3.  for Interest Bearing Securities, redemption yield (running yield in the case of irredeemable securities); and\n4.  for Indexed Bonds, real yield.\n\n  \n\n10.6 Credit Risk\n\n10.6.1 An addition to the resilience reserves is to be made for credit risk in respect of interest bearing and indexed bond assets, including cash deposits and floating rate assets. This will be achieved by a reduction in the value of assets under the relevant adverse scenario. The change will not affect the value of liabilities.\n\n10.6.2 In calculating A”:\n\n1.  The applicable Credit Risk Yield Movement from the table below is first included in the Adjusted Yield as determined in paragraph 10.4.1 to determine A’. The duration used for this purpose may differ from that used to determine sensitivity to interest rate shocks (e.g. floating rate instruments not immediately redeemable may be regarded as dead short for the application of the prescribed yield change, but may have a longer term for the credit risk yield movement, depending on the extent to which credit risk deterioration can be mitigated).\n2.  Each of the values determined in a) above (i.e. A’) is then reduced by the sum of the applicable Credit Risk Default Factor taken from the table below and the Adverse Exchange Movement factor from the table in paragraph 10.5.1.\n\n```html\n<table cellspacing=\"0\" cellpadding=\"0\" style=\"margin-left:84.3pt; border:1.5pt solid #000000; border-collapse:collapse\"><tbody><tr><td colspan=\"3\" style=\"width:292.9pt; border-bottom:1.5pt solid #000000; padding-right:4.65pt; padding-left:4.65pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">Credit factors to apply to fixed interest and cash investments</span></p></td></tr><tr><td style=\"width:79.2pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:4.65pt; vertical-align:top\"><p><span style=\"font-weight:bold\">Counterparty Grade</span></p></td><td style=\"width:88.2pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">Credit Risk Default Factor</span></p></td><td style=\"width:103.9pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:4.65pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">Credit Risk Yield Movement</span></p></td></tr><tr><td style=\"width:79.2pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:4.65pt; vertical-align:top\"><p><span style=\"font-weight:bold\">1 (OECD government)</span></p></td><td style=\"width:88.2pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\"></span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">0.00%</span></p></td><td style=\"width:103.9pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:4.65pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\"></span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">0.0%</span></p></td></tr><tr><td style=\"width:79.2pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:4.65pt; vertical-align:top\"><p><span style=\"font-weight:bold\">1 (other)</span></p></td><td style=\"width:88.2pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\"></span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">0.00%</span></p></td><td style=\"width:103.9pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:4.65pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\"></span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">0.20%</span></p></td></tr><tr><td style=\"width:79.2pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:4.65pt; vertical-align:top\"><p><span style=\"font-weight:bold\">2</span></p></td><td style=\"width:88.2pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">0.00%</span></p></td><td style=\"width:103.9pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:4.65pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">0.30%</span></p></td></tr><tr><td style=\"width:79.2pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:4.65pt; vertical-align:top\"><p><span style=\"font-weight:bold\">3</span></p></td><td style=\"width:88.2pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">0.00%</span></p></td><td style=\"width:103.9pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:4.65pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">0.40%</span></p></td></tr><tr><td style=\"width:79.2pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:4.65pt; vertical-align:top\"><p><span style=\"font-weight:bold\">4</span></p></td><td style=\"width:88.2pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">0.75%</span></p></td><td style=\"width:103.9pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:4.65pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">0.60%</span></p></td></tr><tr><td style=\"width:79.2pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:4.65pt; vertical-align:top\"><p><span style=\"font-weight:bold\">5</span></p></td><td style=\"width:88.2pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">2.00%</span></p></td><td style=\"width:103.9pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:4.65pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">0.80%</span></p></td></tr><tr><td style=\"width:79.2pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:4.65pt; vertical-align:top\"><p><span style=\"font-weight:bold\">6</span></p></td><td style=\"width:88.2pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">6.25%</span></p></td><td style=\"width:103.9pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:4.65pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">0.90%</span></p></td></tr><tr><td style=\"width:79.2pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:4.65pt; vertical-align:top\"><p><span style=\"font-weight:bold\">7</span></p></td><td style=\"width:88.2pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">9.75%</span></p></td><td style=\"width:103.9pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:4.65pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">0.90%</span></p></td></tr><tr><td colspan=\"3\" style=\"width:292.9pt; border-top:0.75pt solid #000000; padding-right:4.65pt; padding-left:4.65pt; vertical-align:top\"><p><span></span></p></td></tr></tbody></table>\n```\n\n10.6.3 In calculating the Adjusted Yield under paragraph 10.4.1 the Credit Risk Yield Movement is always positive, even though the Prescribed Yield Change may be positive or negative, depending on the relevant adverse scenario being tested.\n\n  \n\n10.7 Determination of L’\n\n10.7.1 In determining the change to the discount rate for valuing the liabilities, it is the Prescribed Yield Change for the interest bearing investment sector determined under paragraphs 10.5.1 and 10.5.2 which is relevant. The Adjusted Yield as defined in paragraph 10.4.1 (including diversification and credit risk adjustments) is relevant only for asset values.\n\n10.7.2 In determining the Resilience Reserve required, other assets and liabilities whose value is dependent on the value of investment assets, such as tax assets and liabilities, must be adjusted in a manner consistent with the action the company would take were asset values to change by the prescribed amount. However, in scenarios where asset values are assumed to fall, any resulting tax benefit may only be taken into account to the extent that the Actuary is satisfied that the tax benefit would actually be realised on the company ceasing business.\n\n10.7.3 In calculating L’ no adjustment is required for any potential impact that the Prescribed Yield Change would have on the value of a deficit held in respect of a defined benefit superannuation fund for which the entity, or an associated entity, is an employer sponsor.\n\n10.7.4 The resilience reserve in respect of a retirement village is to be determined, by the Actuary, by reference to the value on a discounted cash flow basis.\n\n10.8 Application of Prescribed Yield Changes\n\n10.8.1 In applying the prescribed yield changes of paragraph 10.5 to the determination of A’ and L’, the Actuary must address the worst combination of rising or falling yields for the different asset sectors to which the business is realistically exposed. At the very least, the following two scenarios must be tested:\n\n1.  rising fixed interest yields (investment categories Interest Bearing and Indexed Bonds) and rising equity/property yields (investment categories Equities and Property), and\n2.  falling fixed interest yields (investment categories Interest Bearing and Indexed Bonds) and rising equity/property yields (investment categories Equities and Property).\n\nWhere the circumstances of the fund are such that other scenarios are potentially relevant then they must also be tested.\n\n  \n\n10.9 Other Asset Exposures\n\n10.9.1 Paragraph 4.2.3 outlines the principles to be followed where the fund is materially exposed to changes in investment market conditions that are not captured by the application of the prescribed rules of this section, and where a corresponding additional provision must be made. In this regard, the Actuary needs to consider the impact on the fund of significant adverse changes in investment markets such as:\n\n1.  changes in the slope and shape of the yield curve, especially those that can give rise to difficulties with the reinvestment of assets backing long term liabilities; and\n2.  changes in yield, volatility and correlation parameters that would be reflected in the fair value of derivative assets or liabilities.\n\n10.9.2 The Actuary must also consider whether the impact of credit risk is adequately provided for through the prescribed credit risk adjustments of paragraph 10.6 noting that the prescribed credit risk adjustments presume that the asset portfolio is highly diversified. If credit risks are not adequately provided for, for example because of a lack of diversification, the Actuary is to employ other additional reserving requirements.\n\nSECTION 11 New Business Reserve\n\n11.1 The New Business Reserve is determined as;\n\na) the additional amount required to ensure that the Solvency Requirement of the General Fund (refer paragraph 6(1)(e)) will continue to be met over the next three years, allowing for capital and profit emerging over that period from the existing business of the fund;\n\nless\n\nb) the New Business Capital\n\nplus\n\nc) the Offset Statutory Capital.\n\n11.2 New business capital is represented by existing, binding arrangements for the external raising of capital specific to the financing of new business within the General Fund.","sortOrder":25},{"sectionNumber":"11.3","sectionType":"subdivision","heading":"Offset Statutory Capital will not apply in the case of a friendly society or an eligible foreign life insurance company. In the case of other life companies, it is determined as the amount of Statutory Capital which has been utilised by the company in meeting the total (across all statutory funds) new business reserve requirements of the company under the Capital Adequacy Standard.","content":"#### 11.3 Offset Statutory Capital will not apply in the case of a friendly society or an eligible foreign life insurance company. In the case of other life companies, it is determined as the amount of Statutory Capital which has been utilised by the company in meeting the total (across all statutory funds) new business reserve requirements of the company under the Capital Adequacy Standard.","sortOrder":26},{"sectionNumber":"11.4","sectionType":"subdivision","heading":"The New Business Reserve must not be less than zero.","content":"#### 11.4 The New Business Reserve must not be less than zero.\n\nSECTION 12 Transitional Arrangements\n\nOverview\n\nThe Management Capital Requirement determined in accordance with this Management Capital Standard AS 6.03 may be significantly different from the equivalent amount determined in accordance with the previous version AS 6.02. To allow life companies that are significantly affected sufficient time to implement any necessary changes for either reducing the Management Capital Requirement or increasing the amount of assets in the General Fund to cover the new Management Capital Requirement it is appropriate to allow some short term transitional arrangements.\n\nThese transitional arrangements will be in the form of a reduction to the amount of the Management Capital Requirement, such reduction reducing to zero over the transitional period.\n\n12.1 Where, at the date of introduction of this Standard, the amount of the Management Capital Requirement determined prior to allowing for any Transitional Adjustment (i.e. after step 6.1(e)) exceeds the Management Capital Requirement that would have resulted at the same date from application of the previous version of this standard (AS 6.02) by an amount exceeding the Transitional Materiality Limit, the Actuary may, with APRA’s agreement, apply a Transitional Adjustment to the Management Capital Requirement in accordance with the provisions of this section.\n\n12.2 The Transitional Adjustment is determined at the date of calculation as:\n\n(MCR – MCR’) x t / n\n\n  \nwhere\n\nMCR \\= the Management Capital Requirement determined prior to allowing for any Transitional Adjustment (i.e. after step 6.1(e)) as at the date of calculation\n\nMCR’ \\= the Management Capital Requirement that would have resulted at the same date from application of the previous version of this standard (AS 6.02)\n\nt \\= the period from the calculation date to the Transition End Date\n\nn \\= the period from application date of this Management Capital Standard to the Transition End Date.\n\nSECTION 13 Materiality\n\nOverview\n\nParticular values or components are considered material to the overall result of a calculation when their mis-statement or omission would cause that result to be misleading to the users of the information.\n\nMateriality tests assess the significance of the particular value/component by relating it to the amount of the overall result to which it contributes.\n\n13.1 The Management Capital Requirement determined in accordance with this Standard is subject to materiality standards applied at the General Fund level.\n\n13.2 The base amount for materiality purposes is the difference between the assets of the General Fund and the Management Capital Requirement of that fund.\n\n13.3 In applying the materiality standards described in paragraphs 13.1 and 13.2:\n\n1.  it is appropriate to use as the base amount for materiality purposes a rolling average of the base amount provided that the average so derived is a function of not less than three and not more than five years experience and is reflective of the current and anticipated future experience; and\n2.  it is appropriate, as the base amount approaches zero, for alternative key indicators to be used in establishing materiality.\n\n13.4 While assessing materiality will always be a matter of professional judgement, the following quantitative thresholds are generally to be used:\n\n1.  variations in amounts of 10% or more of the base amount may be presumed material; and\n2.  variations in amounts of 5% or less of the base amount may be presumed immaterial.\n\n  \nPART C – ACTUARY’S STATEMENT\n\nSECTION 14 Statement Relating to the Determination\n\n14.1 In respect of any determination of the Management Capital Requirement the Actuary must provide in the investigation report required by section 113 or 115 of the Act, details of the calculation processes and the assumptions used in deriving the results.","sortOrder":27},{"sectionNumber":"Capital Standards for the Statutory Fund","sectionType":"division","heading":"Capital Standards for the Statutory Funds","content":"### Capital Standards for the Statutory Funds\n\nThe Life Act establishes a two tier capital requirement on the statutory funds of the life insurance company with each tier considering the capital requirements in a different set of circumstances. The first tier – the Solvency Standard - is intended to ensure, as far as possible, the payment of the liabilities of the company. The second tier – The Capital Adequacy Standard - is intended to secure the financial soundness of the company as a going concern.\n\nJust as there are two tiers of capital requirement, the LIASB in developing these standards proposed two philosophies - discrete and independent; one for each of the standards. The result is that the Capital Adequacy Standard is not necessarily a stronger Solvency Standard; or more importantly, the Solvency Standard is not necessarily a weaker Capital Adequacy Standard. Each capital requirement stands on its own, serves different purposes and brings its own consequences. This is consistent with the intentions and provisions of the Life Act.\n\nThe essential features of the philosophy of the Solvency Standard are as follows:\n\nThe Solvency Standard\n\n considers capital needs in the context of an extended run off situation either under judicial management or following transfer of the business to another insurer, at a high level of confidence\n\n assumes the statutory fund is closed to new business\n\n aims to meet obligations to policy owners (and creditors) while the fund withstands shocks (adverse experience).\n\nFor Capital Adequacy, the essential features are:\n\nThe Capital Adequacy Standard\n\n considers capital needs in the context of an active and viable ongoing concern\n\n assumes the statutory fund is open to new business\n\n aims to meet reasonable expectations of policy owners (and creditors) while the fund withstands larger shocks (significant adverse experience).\n\nThe LIASB acknowledges that, as a consequence of these philosophies, it is possible that in certain circumstances no additional capital is required for capital adequacy purposes over the Solvency Requirement. The circumstances in which this may arise (for example, a slowly growing fund or a declining fund) do not suggest any inconsistency with the underlying philosophies.\n\nThe Solvency Requirement is disclosed in the financial statements of the life insurance company and is intended to be used as an indicator of the financial position of the company. To provide certainty of interpretation and facilitate consistency and comparability across the industry, the standard adopts a primarily prescriptive approach to the determination of the Solvency Requirement.\n\nThe Capital Adequacy Requirement is not required to be disclosed in the financial statements of the company. It will, however, be disclosed to APRA (on a confidential basis) and will be used as an important indicator of the longer term financial position of the company, and a trigger for closer regulatory monitoring in respect of short term solvency. The Capital Adequacy Standard adopts a less prescriptive approach to the determination of the Capital Adequacy Requirement in recognition of the differing business strategies of the companies. Reliance is placed on the professionalism of the Actuary for appropriate assessment of the Capital Adequacy Requirement of a company in accordance with the principles of this Standard.\n\nThe policy owner protection objectives of the Life Act are again reinforced through these standards – the distribution of retained profits or shareholder capital of a statutory fund is restricted where the Capital Adequacy Requirement is not met. Distributions to policy owners may continue while ever the company remains solvent.","sortOrder":28},{"sectionNumber":"Capital Standard for the Management Fund","sectionType":"division","heading":"Capital Standard for the Management Fund/Shareholders’ Fund","content":"### Capital Standard for the Management Fund/Shareholders’ Fund\n\nThe Management Capital Standard is established under the Life Act and establishes a requirement to hold capital in the management fund/shareholders’ fund to ensure the security of that fund and its business activities under adverse operating circumstances. This capital is additional to the capital requirements for the statutory funds.\n\nThe Management Capital Requirement is determined by considering the various risks which could impact the security of the company’s operations and, by consequence, policy owner entitlements and requiring the provision of a prudent level of reserve against such risks.\n\nThe approach to determining the Management Capital Requirement recognises the separate and distinct nature of a life company’s statutory funds in respect of its life insurance business and the extent to which the risks associated with undertaking life insurance business are provided for in the Solvency and Capital Adequacy Standards.\n\nSecurity of the entitlements of policy owners, however, cannot be considered totally isolated from risks associated with operations outside the statutory funds. In the case of friendly societies, the risks associated with the administration and operational support of the life insurance business are borne outside the statutory funds. Further, a life company may operate businesses (other than life insurance related business) outside its statutory funds. The risks incurred in all respects have implications for the overall security of the company and hence of the policy owners.","sortOrder":29},{"sectionNumber":"Other Actuarial Standards","sectionType":"division","heading":"Other Actuarial Standards","content":"### Other Actuarial Standards\n\nThe Life Act also provides for actuarial standards in respect of the calculation of minimum surrender values and the cost of investment performance guarantees.\n\nThe principle of protecting the interests of policy owners and ensuring equity as between groups of policy owners (terminating as against remaining, those with guaranteed entitlements as against those with market related entitlements) underlies these standards.\n\nThe Surrender Value Standard serves an important purpose in the determination of solvency requirements, by providing a floor for the value of the solvency liabilities. The principle which prevails in this case is that the minimum value of the liabilities for solvency purposes (before adding margins for other risks relating to expenses and assets) must be sufficient to secure the minimum entitlement of all policy owners at that time.","sortOrder":30},{"sectionNumber":"2. APPLICATION OF THE STANDARDS TO FRIEN","sectionType":"part","heading":"2. APPLICATION OF THE STANDARDS TO FRIENDLY SOCIETIES","content":"#   \n2. APPLICATION OF THE STANDARDS TO FRIENDLY SOCIETIES\n\nThe Life Act was amended in 1999 to extend its application to friendly societies that undertake life insurance business. In June 1999, the LIASB released a set of actuarial standards relevant to friendly societies. It was acknowledged at the time of release that these standards were transitional, largely reinstating the requirements of the pre-existing Australian Financial Institutions Commission regulatory regime. In 2002 there was a harmonisation of the Friendly Society standards with the life insurance standards. Following the adoption of the International Financial Reporting Standards and the lapse of the ASIC Class Order, there has been further alignment such that the Valuation Standard, AS 1.04, now applies to both life insurance companies and friendly societies.\n\nHarmonisation of Actuarial Standards\n\nIn developing a set of actuarial standards to apply commonly to friendly societies and life companies, regard must be had for the differences that exist between the two sectors of the industry.\n\nTerminology\n\nAt the simplest level, there are differences of terminology used within the industry sectors – for instance, benefit fund in a friendly society and statutory fund in other life companies. The actuarial standards adopt the same approach to terminology as taken in the Life Act. The following table provides linkages between the terminology adopted in the Life Act and actuarial standards, and that commonly used in practice by friendly societies.\n\n| Life Act Concept                   | Friendly Society Concept      |\n| ---------------------------------- | ----------------------------- |\n| Statutory fund                     | Benefit fund                  |\n| Life company, company              | Friendly society              |\n| Best estimate liability            | Value of benefit entitlements |\n| Policy owner                       | Benefit fund member           |\n| Policy document                    | Benefit fund rules            |\n| Life policy, life insurance policy | Interest in a benefit fund    |\n| Shareholders’ fund                 | Management fund               |\n\nStructure of a Friendly Society\n\nOne of the more significant differences is in the structure of the friendly society (compared to other life companies).\n\nBenefit Funds\n\nThe friendly society segregates its business through benefit funds, where those benefit funds are single product funds. As a consequence, requirements (in the Life Act and actuarial standards) for the segregation of the business of a statutory fund into classes, categories and/or related product groups are not relevant to a friendly society. The benefit fund of a friendly society is effectively a related product group.\n\nFollowing the lapse of the ASIC class order, it is appropriate, for the purposes of applying the Valuation Standard, for benefits provided in benefit funds where there is a provision for distribution of unallocated surpluses to policy owners to be valued as if they were participating. Benefits provided under benefit funds where is no provision for distribution of unallocated surpluses to policy owners are to be valued as if they were non-participating.\n\nManagement Fund\n\nFriendly societies also operate a management fund. This fund is distinct and separate from the benefit funds, and undertakes operational and administrative functions in respect of the life insurance business of those funds (as well as other business activities) for which the benefit funds pay a management fee.\n\nAs a result of this operational structure, certain of the risks associated with the life insurance business – in particular, expense risks - are borne by the management fund in the friendly society.\n\nTherefore, in applying the provisions of the actuarial standards to a friendly society, reference to expenses of the statutory fund, whether actual or expected, should be taken to mean the contracted management fees in respect of the business of that fund.\n\nExpense risks related to the life business of a friendly society are provided for in the management fund through the Management Capital Standard. The same risks for other life companies will be provided for in their statutory funds through the Solvency and Capital Adequacy Standards.","sortOrder":31},{"sectionNumber":"3. HOW TO USE THE ACTUARIAL STANDARDS","sectionType":"part","heading":"3. HOW TO USE THE ACTUARIAL STANDARDS","content":"#   \n3. HOW TO USE THE ACTUARIAL STANDARDS\n\nThe actuarial standards are made by the LIASB under prescribed powers in the Life Act. In developing the standards the LIASB follow a defined due process for exposure to, and consultation with, the industry and other stakeholders.\n\nThe standards are disallowable instruments and will have been through the parliamentary processes, with notice of the making of the standards being published in the Commonwealth Government Notices Gazette.\n\nThe legislative requirements prescribed in the actuarial Standard are shown in bold type.\n\nMost sections of the standard are preceded by an overview - shown in normal print - intended as a plain English introduction to the principles which are developed in greater detail in the relevant section. The overview facility can be used as an aid to interpretation, and to the intent of the Standard.\n\nNewsletters, released periodically, provide background to, and an insight to the considerations of the LIASB in, the development of the standards. The most recent changes to the Standards have also been accompanied by an Explanatory Memorandum at the Discussion Draft, Exposure Draft and final issue stages.\n\nDefined terms are Capitalised in the standards, and the definitions of those terms can be found in the consolidated dictionary at section 5 of this General Standard.\n\nChange in Style\n\nThe style of the actuarial standards was modified as part of the process for harmonisation of actuarial standards (March 2002 version of standards).\n\nPre March 2002 versions of the standards incorporated a significant amount of commentary to guide in the interpretation of the principles. Further, a please note facility was used as a means of emphasising special messages to the practitioner readers.\n\nThe benefit of this commentary is available, if required by the practitioner, by accessing these earlier versions of the standards.\n\nIt is also noted that the Institute of Actuaries of Australia (IAAust) has issued guidance material on the interpretation and/or practical application of certain aspects of the LIASB’s actuarial standards.","sortOrder":32},{"sectionNumber":"4. HISTORY OF THE DEVELOPMENT OF THE ACT","sectionType":"part","heading":"4. HISTORY OF THE DEVELOPMENT OF THE ACTUARIAL STANDARDS","content":"#   \n4\\. HISTORY OF THE DEVELOPMENT OF THE ACTUARIAL STANDARDS\n\n9 October 1996 The Valuation Standard version AS1.01 was made.\n\n15 November 1996 The following actuarial standards were made:\n\n\\- The Solvency Standard version AS2.01\n\n\\- The Capital Adequacy Standard version AS3.01\n\n13 October 1997 The following actuarial standards were made:\n\n\\- The Surrender Value Standard version AS4.01\n\n\\- The Investment Performance Guarantee Standard version AS5.01\n\n24 June 1999 An Instrument of Variation was made, varying the following actuarial standards to apply only to life companies that are not friendly societies:\n\n\\- The Valuation Standard version AS1.01\n\n\\- The Solvency Standard version AS2.01\n\n\\- The Capital Adequacy Standard version AS3.01.\n\n\\- The Surrender Value Standard version AS4.01\n\n\\- The Investment Performance Guarantee Standard version AS5.01\n\nAND\n\nThe following actuarial standards were made:\n\n\\- The Friendly Society Valuation Standard version ASFS1.01\n\n\\- The Friendly Society Solvency Standard version ASFS2.01\n\n\\- The Friendly Society Capital Adequacy Standard version ASFS3.01\n\n\\- The Friendly Society Investment Performance Guarantee Standard version ASFS5.01\n\n\\- The Friendly Society Management Capital Standard version ASFS6.01\n\n\\- The Management Capital Standard version AS6.01\n\n  \n\n20 September 1999 An Instrument of Variation was made to prescribe a completion date for the following actuarial standards:\n\n\\- The Valuation Standard version AS1.01\n\n\\- The Solvency Standard version AS2.01\n\n\\- The Capital Adequacy Standard version AS3.01\n\nAND\n\nThe following actuarial standards were made:\n\n\\- The Valuation Standard version AS1.02\n\n\\- The Solvency Standard version AS2.02\n\n\\- The Capital Adequacy Standard version AS3.02\n\n28 March 2002 An Instrument of Variation was made to prescribe a completion date for the following actuarial standards:\n\n\\- The Valuation Standard version AS1.02\n\n\\- The Solvency Standard version AS2.02\n\n\\- The Capital Adequacy Standard version AS3.02\n\n\\- The Surrender Value Standard version AS4.01\n\n\\- The Investment Performance Guarantee Standard version AS5.01\n\n\\- The Management Capital Standard version AS6.01\n\n\\- The Friendly Society Valuation Standard version ASFS1.01\n\n\\- The Friendly Society Solvency Standard version ASFS2.01\n\n\\- The Friendly Society Capital Adequacy Standard version ASFS3.01\n\n\\- The Friendly Society Investment Performance Guarantee Standard version ASFS5.01\n\n\\- The Friendly Society Management Capital Standard version ASFS6.01\n\nAND\n\nThe following actuarial standards were made:\n\n\\- The Valuation Standard version AS1.03\n\n\\- The Friendly Society Valuation Standard version ASFS1.02\n\n\\- The Solvency Standard version AS2.03\n\n\\- The Capital Adequacy Standard version AS3.03\n\n\\- The Management Capital Standard version AS6.02\n\n\\- The Surrender Value Standard version AS4.02\n\n\\- The Investment Performance Guarantee Standard version AS5.02\n\n\\- The General Standard version AS7.01\n\n5 December 2005 An Instrument of Revocation was made to revoke the following actuarial standards and to determine the completion date from which the requirements under those actuarial standards would cease to apply:\n\n\\- The Valuation Standard version AS1.03\n\n\\- The Friendly Society Valuation Standard version ASFS1.02\n\n\\- The Solvency Standard version AS 2.03\n\n\\- The Capital Adequacy Standard version AS3.03\n\n\\- The Management Capital Standard version AS6.03\n\n\\- The General Standard version AS7.01\n\nThe following actuarial standards were made:\n\n\\- The Valuation Standard version AS1.04\n\n\\- The Solvency Standard version AS 2.04\n\n\\- The Capital Adequacy Standard version AS3.04\n\n\\- The Management Capital Standard version AS6.03\n\n\\- The General Standard version AS7.02","sortOrder":33},{"sectionNumber":"5. DICTIONARY","sectionType":"part","heading":"5. DICTIONARY","content":"#   \n5\\. DICTIONARY\n\n5.1 Application\n\nThe Dictionary is made under section 101(2) of the Life Insurance Act 1995 and is applicable to the interpretation of all actuarial standards made under that section.\n\nIt applies at all times from 31 December 2005.\n\nTerminology used in the actuarial standards, to the extent it is not specifically defined in the Dictionary, takes the same meaning as that in the Life Insurance Act 1995.\n\n5.2 Definitions\n\nAASB: Australian Accounting Standard Board\n\nAcquisition Expenses: The fixed and variable expenses of the company to the extent they are, either directly or indirectly, referable to those activities of the company related to the acquiring of that new business expected to derive from the expenditure.\n\nAcquisition Expense Recovery Carrier: A financially measurable indicator of the element of a Related Product Group designed or intended to recover Acquisition Expenses.\n\nAcquisition Expense Recovery Component: A uniform margin of an Acquisition Expense Recovery Carrier, determined in accordance with section 6 of the Valuation Standard.\n\nActuarial Gains and Losses: For the purposes of recognising the value of obligations arising in respect of a defined benefit superannuation fund in the accounts of the employer sponsor, actuarial gains and losses comprise\n\n-   experience adjustments (the effects of differences between the previous actuarial assumptions and what has actually occurred); and\n-   the effects of changes in actuarial assumptions.\n\nActuary: An appointed actuary as defined under the Act.\n\nAdequacy Threshold: The Adequacy Threshold is the minimum value for Profit Margins of a Related Product Group under the Valuation Standard - i.e. it is the level at which losses must be recognised. The Adequacy Threshold is to be determined in accordance with Section 11 of the Valuation Standard.\n\nAdmissible Assets: The total assets of the statutory fund or Fund as appropriate excluding those assets, or the parts of those assets, prescribed as inadmissible for the purposes of the Solvency, Capital Adequacy or Management Capital Standard.\n\nApproved Country: An overseas country having capital requirements in respect of life insurance business comparable to those in the Act. The business of such countries, when written in a separate statutory fund, is excluded from the capital requirements of the Act.\n\nThe Approved Countries are UK, USA, Canada.\n\nApproved Subordinated Debt: The quantum of debt under an instrument of subordinated debt that, in accordance with approval processes of the Australian Prudential Regulation Authority, can be used in meeting the capital requirements of a statutory fund.\n\nBest Estimate Assumptions: Assumptions about future experience determined in accordance with section 3 of the Valuation Standard.\n\nBest Estimate Liability: The amount expected on Best Estimate Assumptions to be required to the end of the benefit period to meet future benefits and expenses related to past transactions for the business in force. The calculation process will take into account all factors which are known to be material, including future investment earnings, taxation, any options under the policies and future premiums, where relevant to the calculation.\n\nBest Estimate Bonus: The maximum level of Bonus which (on Best Estimate Assumptions and taking into account the company’s profit distribution philosophy, including shareholder entitlements) can be added to a Participating Benefit over its benefit life without supplementary income from other sources, including policy owner retained profits.\n\nBest Estimate Discretionary Addition: The level of discretionary addition which (on Best Estimate Assumptions and taking into account the company’s crediting philosophy) can be added to a Non-Participating Benefit over its benefit life without supplementary income from other sources, including policy owner retained profits.\n\nBest Estimate Shareholder Profit: The maximum level of Shareholder Profit which (on Best Estimate Assumptions and taking into account the company’s profit distribution philosophy, including policy owner entitlements) can be attributed to shareholders without supplementary income from other sources, including shareholders’ retained profits.\n\nBonus: An amount of profit added at the discretion of the company (including additions in respect of investment experience) to the benefits due under a Participating Benefit, but excluding any guaranteed rate of addition also applicable to the benefit.\n\nCapital Adequacy Assumptions: Assumptions about future experience made in the context of the more adverse experience prescribed for the purposes of capital adequacy.\n\nCapital Adequacy Liability: An intermediate component in the determination of the Capital Adequacy Requirement, which reflects the assessed liabilities in respect of policies on the basis of Capital Adequacy Assumptions.\n\nCapital Adequacy Requirement: The capital requirement calculated in accordance with the Capital Adequacy Standard, as prescribed by the Life Insurance Actuarial Standards Board, in accordance with section 70 of the Act.\n\nCapital Adequacy Standard: An actuarial standard for the capital adequacy of a statutory fund as prescribed by the Life Insurance Actuarial Standards Board, in accordance with section 70 of the Act.\n\nClaims Cost Liability: The Claims Cost Liability for disability income policies is the component of the liability for active lives in respect of claims.\n\nCommencement: The inception of a policy being the point as at which Profit Margins or Acquisition Expense Recovery Components are, or would be, first determined.\n\nContractual Minimum Value: The lowest Termination Value the company is obliged to pay in accordance with the policy documentation and promotional material.\n\nCounterparty Grade: The Counterparty Grade of an investment is the Grade reflected under the first column of the table in Attachment 1 of this standard for the equivalent Standard and Poor’s, Moody’s, AM Best or Fitch rated investment.\n\nCurrent Termination Value: The Termination Value of a policy at the reporting date.\n\nDate of Commencement: A date used in the determination of minimum surrender values in the Surrender Value Standard. Refer to paragraph 4.2.4 of that standard.\n\nDiscretionary Addition: An amount added to a Non-Participating Benefit, at the discretion of the company, to reflect the investment experience of the assets backing the benefit, but excluding any guaranteed rate of addition also applicable to the benefit. For this definition an amount added to a benefit is defined to mean any change to the previously applying contractual conditions that is beneficial to the policy owner.\n\nDiscretionary Participation Feature: A contractual right to receive, as a supplement to guaranteed benefits, additional benefits:\n\n-   that are likely to be a significant portion of the total contractual benefits;\n-   whose amount or timing is contractually at the discretion of the issuer; and\n-   that are contractually based on:\n    -   the performance of a specified pool of contracts or a specified type of contract;\n    -   realised and/or unrealised investment returns on a specified pool of assets held by the issuer; or\n    -   the profit or loss of the company, fund or other entity that issues the contract.\n\nEducation Bond Business: A form of Unbundled Investment Business where the policies provide for the payment of a defined benefit for the specific purpose of contributing towards the expenses of and incidental to the education of the beneficiary.\n\nEquity: All investments categorised as Equities for the purpose of reporting under Prudential Rules No. 26 plus:\n\n-   all listed trusts except those where the Actuary adopts a ‘look through’ approach; and\n-   the equity exposure of convertible notes; and\n-   other investment assets, unless the Actuary can justify including the asset in Property, Interest Bearing Securities or Indexed Bonds.\n\nEstablishment Fee: A fee received at the Commencement of a policy which is intended to, at least partially, cover Acquisition Expenses. It does not include contingent entitlement to exit fees or surrender penalties.\n\nExpense Category: A grouping of the expenses directly or indirectly referable to life business. For the purposes of actuarial standards, three categories of expense are defined: Acquisition Expenses, Maintenance Expenses and Investment Management Expenses.\n\nExpense Driver: A quantifiable measure in relation to which the relevant expenses of the company are expected to vary.\n\nExpense Reserve: A component of the determination of the Solvency Requirement and Management Capital Requirement, which reflects capital requirements arising from expense risks in a closed fund scenario.\n\nExperience Profit: The profit arising in a period from the difference between actual experience during that period and expected experience on the basis of Best Estimate Assumptions at the beginning of the period.\n\nFinancial Risk: The risk of a possible future change in one or more of a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract.\n\nFinancial Services Entity: A Financial Services Entity includes:\n\n-   A life company (within the meaning of the Life Insurance Act 1995), general insurer (within the meaning of the Insurance Act 1973), health insurance institution (being a registered organization within the meaning of Part VI of the National Health Act 1953), ADI (within the meaning of the Banking Act 1959), foreign equivalent of any such company, or a Group containing one or more such companies;\n-   A mortgage lender, leasing company or Group containing one or more such companies;\n-   A superannuation trustee or administrative services company administering financial services business for third parties or the Group’s own business;\n-   A financial advising distribution company providing financial advice and distributing products of third parties or the Group’s own products;\n-   An investment management entity (such as a funds manager, property manager, asset custodian, trustee company, etc) managing the assets of third parties, or those of the Group;\n-   An investment servicing company (such as a property maintenance company, property developer or share registry) providing services to the Group’s own investment assets or other third parties.\n\nFinancial Instrument Element: The activities and associated cash flows of a Life Investment Contract that relate directly to the establishment of a financial asset or financial liability.\n\nFixed Term/Rate Business: Policies which provide for guaranteed investment returns at a disclosed rate for a specified period. The guaranteed returns may be paid in the form of income or as capital at maturity. The specified period of the guarantee may be the full term of the policy, or may be to an interim point at which the option exists to ‘roll’ the policy for a further specified period at a new guaranteed return.\n\nFunctional Activity: A group of activities of a company consistent with the operational structure of the life business. The functional groupings facilitate the processes of expense recording, accounting and apportionment in the company.\n\nFuneral Bond Business: Policies providing continuous insurance against the contingency of death on terms and conditions agreed at the commencement of the policy, where:\n\na) the primary purpose of the benefit is to meet the expenses of and incidental to the funeral of the policy owner, their spouse or children; and\n\nb) the amount of the benefit (excluding any entitlement to bonus) is no greater than $15,000.\n\nFuneral Bond Business includes any business written prior to 30 June 2002 which is classified as traditional friendly society sick and funeral business and where no surrender value is payable on withdrawal.\n\nGeneral Fund: A term used in the Management Capital Standard to refer to the management fund for a friendly society or the shareholders’ fund for other life companies.\n\nInadmissible Assets Reserve: A component of the determination of the Solvency Requirement, Capital Adequacy Requirement and Management Capital Requirement, which reflects the capital requirements arising from holding assets qualifying as inadmissible under these standards.\n\nIndexed Bonds: All investments categorised as Index Linked Interest Bearing Securities for the purpose of reporting under Prudential Rules No. 26 but excluding listed trusts where the Actuary does not adopt a ‘look through’ approach.\n\nInsurance Contract: A contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.\n\nInsurance Risk: Risk, other than financial risk, transferred from the holder of a contract to the issuer.\n\nInterest Bearing Securities: All investments categorised as Non-index linked Interest Bearing Securities for the purpose of reporting under Prudential Rules No. 26, plus loans, convertible notes exposed to interest rates, and cash but excluding listed trusts where the Actuary does not adopt a ‘look through’ approach.\n\nInvestment Management Expenses: The fixed and variable expenses of the company to the extent they are, either directly or indirectly, referable to those activities of the company related to the management of the investment portfolio.\n\nInvestment Performance Guarantee: An investment performance guarantee in accordance with section 42 of the Act.\n\nLiability Component: A component of the determination of the Management Capital Requirement.\n\nLife Insurance Contract: An Insurance Contract, or a financial instrument with a Discretionary Participation Feature, regulated under the Life Insurance Act.\n\nLife Investment Contract: A contract which is regulated under the Life Insurance Act 1995 but which does not meet the definition of a Life Insurance Contract.\n\nLong Term Risk Business: Policies providing continuous insurance against the contingency of death, other than solely by accident, on terms and conditions agreed at the commencement of the policy, where:\n\n1.  a level premium is paid through the term of the policy; and\n2.  the term of the policy is:\n\n1.  greater than or equal to 15 years; and\n2.  such that the policy owner is aged greater than 70 at the expiry of that term; and\n\n1.  the amount of insurance (excluding any entitlement to bonus) is greater than $15,000.\n\nMaintenance Expenses: The fixed and variable expenses of the company to the extent they are, either directly or indirectly, referable to those activities of the company related to the administration of:\n\n1.  policies subsequent to their sale, including policies subject to claim; and\n2.  the general operations, including maintenance of the overall health, of the company.\n\nMaintenance Expenses include all operating costs and expenses other than Acquisition Expenses and Investment Management Expenses.\n\nManagement Capital Requirement: The capital requirement calculated in accordance with the Management Capital Standard, as prescribed by the Life Insurance Actuarial Standards Board, in accordance with section 73B of the Act.\n\nManagement Capital Standard: An actuarial standard for the capital of the shareholders’ fund as prescribed by the Life Insurance Actuarial Standards Board, in accordance with section 73B of the Act.\n\nManagement Services Element: All activities and cashflows arising from the full range of management services provided under a Life Investment Contract, including investment management, financial planning and advice. This will equal all the activities and cashflows of the Life Investment Contract excluding those in respect of the Financial Instrument Element.\n\nMinimum Surrender Value: The surrender value determined in accordance with the Surrender Value Standard.\n\nMid Swap Rate: The Mid Swap Rate is the rate (or rates) equivalent to a series of current, observable and objective Australian Dollar interest rate swap mid rates (derived from the relevant zero coupon rather than the par curve) that relates to the term of the future liability cash flows.\n\nMinimum Termination Value: The greater of, at the reporting date:\n\n1.  the lowest Termination Value that the company is obliged to pay; and\n2.  the amount calculated in accordance with the Surrender Value Standard.\n\nMinimum Paid-up Value: The paid-up value determined in accordance with the Surrender Value Standard.\n\nNational Government Guaranteed Securities: Securities secured by the national government of the country in whose currency the liabilities of the statutory fund are denominated.\n\nNet Policy Liability: The Policy Liability calculated after allowing for outward reinsurance premiums as an expense and reinsurance recoveries as income.\n\nNew Business Capital: Capital recognised within the context of the Capital Adequacy Standard or Capital Management Standard as an appropriate offset against the new business capital requirements of the statutory fund or management/shareholders’ fund respectively.\n\nNew Business Reserve: A component of the determination of the Capital Adequacy Requirement and Management Capital Requirement, which reflects any additional capital requirements arising from future new business.\n\nNon-Participating Benefit: A non-participating benefit in accordance with section 15 of the Act.\n\nNormal Investment Earnings: A component of the determination of minimum surrender values in the Surrender Value Standard. (Refer to section 4.4 of that standard for more detail).\n\nNormal Ongoing Charges: A component of the determination of minimum surrender values in the Surrender Value Standard. (Refer to section 4.3 of that standard for more detail).\n\nOECD Government: In the context of determining credit risk factors, OECD Government refers to assets that are guaranteed by an Australian state or Federal government or by a national government of another OECD country.\n\nOffset Statutory Capital: Statutory Capital to the extent it has actually been utilised in offsetting components of the statutory fund capital requirements – either the Expense Reserve under the Solvency Standard or the New Business Reserve under the Capital Adequacy Standard.\n\nThe Offset Statutory Capital of a company should reflect the aggregate of amounts of Statutory Capital so utilised in each statutory fund and in respect of both Expense Reserve and New Business Reserve components. The Offset Statutory Capital of a company, by definition, may not exceed the Statutory Capital of that company.\n\nOperating Profit: Operating profit in accordance with section 58 of the Act.\n\nOperating Surplus: Operating surplus in accordance with section 58 of the Act as modified by Regulation in its application to friendly societies.\n\nOther Liability: A liability according to general accounting concepts, which is referable to the statutory fund, other than a Policy Liability or Approved Subordinated Debt.\n\nParticipating Benefit: A participating benefit in accordance with section 15 of the Act.\n\nPolicy Liability: A liability calculated in accordance with the Valuation Standard.\n\nPolicy Owner Profit Share: The entitlement of the policy owner to share in the profits emerging from the benefits.\n\nPrescribed Account Value: A component of the determination of minimum surrender values in the Surrender Value Standard. (Refer to section 4.2 of that standard for more detail).\n\nProfit Carrier: A financially measurable indicator of the provision of a service or related income.\n\nProfit Margin: A percentage of a Profit Carrier, determined in accordance with the Valuation Standard.\n\nProperty: All investments categorised as Investment Property for the purpose of reporting under Prudential Rules No. 26 plus owner occupied property, but excluding listed property trusts where the Actuary does not adopt a ‘look through’ approach.\n\nRegular Premium Business: Life business where:\n\n1.  there exists a contractual obligation on the policy owner to make subsequent premium payments after the first premium payment; or\n2.  the scale or level of charges levied against the policy distinguishes between first and subsequent premiums.\n\nReinsurance: Refers to all arrangements where some part of individual or aggregate insurance risks are ceded to another company or companies and include cessions of direct writing companies to reinsurance companies or other direct writing life companies and parent companies as well as retrocessions of Reinsurers to their parent companies or other Reinsurers.\n\nReinsured Best Estimate Liability: The component of the Reinsured Policy Liability, being the Best Estimate Liability in respect of outwards reinsurance business.\n\nReinsured Policy Liability: The Policy Liability calculated by considering as premiums only reinsurance premiums and considering as benefits only reinsurance recoveries.\n\nReinsurer: Any company providing reinsurance cover, whether a parent life company, direct writing company or reinsurance company.\n\nRelated Product Group: A grouping of products where those products are considered by the Actuary to exhibit benefit characteristics and pricing structures sufficiently similar as to justify grouping for the purposes of profit margin calculation, loss recognition or reporting. A Related Product Group must not extend over subcategories, where a subcategory is defined in the Act.\n\nResilience: The ability of a statutory fund to withstand shocks to the economic environment in which it operates and which are likely to cause a sudden reduction in asset values or a requirement to assess liabilities using reduced investment earning rates.\n\nResilience Reserve: A component of the determination of the Solvency Requirement, Capital Adequacy Requirement and Management Capital Requirement, which reflects the capital requirements that need to be held before the happening of a prescribed set of changes in the economic environment, such that after the changes the company is able to meet the policy owner and other liabilities of the statutory fund, including the assessed liability risks in accordance with these standards.\n\nRetail Business: Life business which is not Wholesale Business.\n\nRisk Business: Life business which does not include any investment component.\n\nRisk Free Discount Rate: The rate (or rates) based on the current observable, objective rates that relate to the nature, structure and term of the future liability cash flows.\n\nServicing Expenses: The combination of Maintenance and Investment Management Expenses.\n\nShareholder Profit Share: The entitlement of the shareholder to share in the profit emerging from the benefits.\n\nShareholder Profits: An amount of profits attributable to the shareholder.\n\nSingle Premium Business: Life business which is not Regular Premium Business.\n\nSolvency Assumptions: Assumptions about future experience made in the context of the more adverse experience prescribed for the purposes of solvency.\n\nSolvency Liability: An intermediate component in the determination of the Solvency Requirement, which reflects the assessed liabilities in respect of policies on the basis of Solvency Assumptions.\n\nSolvency Requirement: The capital requirement calculated in accordance with the Solvency Standard, as prescribed by the Life Insurance Actuarial Standards Board, in accordance with section 65 of the Act.\n\nSolvency Standard: An actuarial standard for the solvency of a statutory fund as prescribed by the Life Insurance Actuarial Standards Board, in accordance with section 65 of the Act.\n\nSpecialist Reinsurer: A registered life company under the Act, the predominant business of which is Reinsurance business.\n\nStatutory Capital: Assets of the General Fund to the extent available to be utilised in offsetting components of the statutory fund capital requirements; either the Expense Reserve under the Solvency Standard or the New Business Reserve under the Capital Adequacy Standard. In determining the availability of assets for this purpose, regard must be had for any implications for capital requirements on the General Fund under prudential standards of the Australian Prudential Regulation Authority.\n\nSurrender Value Standard: An actuarial standard for the minimum surrender value in respect of a policy as prescribed by the Life Insurance Actuarial Standards Board, in accordance with sections 65, 207 and 209 of the Act.\n\nTermination Value: The Termination Value of a policy is either:\n\n1.  the amount that would be paid on the basis used in practice from time to time in the event of voluntary termination; or\n2.  where no amount would be paid, the discounted present value of the unexpired risks, future payments and/or contractual premium refunds.\n\nTraditional Business: Life business containing an investment component but excluding Unbundled Investment Business, Fixed Term/Rate Business and income stream business. Traditional Business includes whole of life and endowment policies. Long Term Risk Business and Funeral Bond Business is, for the purposes of the Surrender Value Standard, Traditional Business.\n\nTransition End Date: 31 December 2007, or such other date as is agreed to by APRA for the particular life company.\n\nTransitional Materiality Limit: The Transitional Materiality Limit for the purpose of the Solvency Standard and the Capital Adequacy Standard, is the lesser of:\n\n1.  5% of the excess of the Solvency Requirement (determined prior to allowing for any Transitional Adjustment - i.e. after step 6.1(h) in the Solvency Standard) over the sum of:\n\n-   the Minimum Termination Value; and\n-   Other Liabilities;\n\nwhere those amounts are the same as applied in the calculation of the Solvency Requirement; and\n\n1.  5% of the excess of the Capital Adequacy Requirement (determined prior to allowing for any Transitional Adjustment - i.e. after step 7.1(h) in the Capital Adequacy Standard) over the sum of:\n\n-   the Minimum Termination Value; and\n-   Other Liabilities;\n\nwhere those amounts are the same as applied in the calculation of the Solvency Requirement.\n\nThe Transitional Materiality Limit for the purpose of the Management Capital Standard is 5% of the excess of the Management Capital Requirement (determined prior to allowing for any Transitional Adjustment - i.e. after step 6.1(e) in the Management Capital Standard) over the total of the realistic value of liabilities of the General Fund, where the realistic value of liabilities is the same as applied in the calculation of the Liability Component in accordance with the Management Capital Standard.\n\nUnbundled Investment Business: Life business containing an investment component, where that and the other components of service provided under the policy are unbundled (separately disclosed and costed). Unbundled Investment Business includes investment account and investment-linked business (including allocated annuities and deferred annuities during the period of deferment) and Education Bond Business.\n\nUnrecognised Actuarial Gains (losses): That portion of Actuarial Gains and Losses in respect of a defined benefit superannuation fund for which the life insurance company, or an associated entity, is the employer sponsor, that has not been recognised as income or expense in the company’s accounts.\n\nValue of Supporting Assets: The value of assets determined in accordance with the Valuation Standard as being available to support benefits entitled to bonuses or discretionary additions.\n\nValuation Standard: An actuarial standard for the valuation of policy liabilities as prescribed by the Life Insurance Actuarial Standards Board, in accordance with section 114 of the Act.\n\nWholesale Business: Superannuation business where the effective purchasing decision is made by a trustee or company except that where the number of members has always been less than 5 it is retail business.\n\n  \n\nATTACHMENT 1 – COUNTERPARTY GRADE\n\nThe Counterparty Grade for investments that have been publicly rated is determined from the following table:\n\n```html\n<table cellspacing=\"0\" cellpadding=\"0\" style=\"width:504pt; border:0.75pt solid #000000; border-collapse:collapse\"><tbody><tr><td style=\"width:32.7pt; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:justify\"><span></span></p></td><td colspan=\"4\" style=\"width:222.15pt; border-right:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">Short Term Ratings</span></p></td><td colspan=\"4\" style=\"width:216pt; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">Long Term Ratings</span></p></td></tr><tr><td style=\"width:32.7pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:justify\"><span style=\"font-weight:bold\">Grade</span></p></td><td style=\"width:51pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">Standard &amp; Poor’s</span></p></td><td style=\"width:61.7pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">Moody’s</span></p></td><td style=\"width:45.35pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">AM Best</span></p></td><td style=\"width:31.7pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">Fitch</span></p></td><td style=\"width:53pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">Standard &amp; Poor’s</span></p></td><td style=\"width:45.9pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">Moody’s</span></p></td><td style=\"width:45.9pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">AM Best</span></p></td><td style=\"width:38.8pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">Fitch</span></p></td></tr><tr><td style=\"width:32.7pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p><span style=\"font-weight:bold\">1</span></p></td><td style=\"width:51pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">A1+</span></p></td><td style=\"width:61.7pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\"></span></p></td><td style=\"width:45.35pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">AMB-1+</span></p></td><td style=\"width:31.7pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">F1+</span></p></td><td style=\"width:53pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">AAA</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\"></span></p></td><td style=\"width:45.9pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">Aaa</span></p></td><td style=\"width:45.9pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">aaa</span></p></td><td style=\"width:38.8pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">AAA</span></p></td></tr><tr><td style=\"width:32.7pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p><span style=\"font-weight:bold\">2</span></p></td><td style=\"width:51pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">A1</span></p></td><td style=\"width:61.7pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">P1</span></p></td><td style=\"width:45.35pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">AMB-1</span></p></td><td style=\"width:31.7pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">F1</span></p></td><td style=\"width:53pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">AA+</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">AA</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">AA-</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\"></span></p></td><td style=\"width:45.9pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">Aa1</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">Aa2</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">Aa3</span></p></td><td style=\"width:45.9pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">aa+</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">aa</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">aa-</span></p></td><td style=\"width:38.8pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">AA+</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">AA</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">AA-</span></p></td></tr><tr><td style=\"width:32.7pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p><span style=\"font-weight:bold\">3</span></p></td><td style=\"width:51pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">A2</span></p></td><td style=\"width:61.7pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">P2</span></p></td><td style=\"width:45.35pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">AMB-2</span></p></td><td style=\"width:31.7pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">F2</span></p></td><td style=\"width:53pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">A+</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">A</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">A-</span></p></td><td style=\"width:45.9pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">A1</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">A2</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">A3</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\"></span></p></td><td style=\"width:45.9pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">a+</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">a</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">a-</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\"></span></p></td><td style=\"width:38.8pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">A+</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">A</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">A-</span></p></td></tr><tr><td style=\"width:32.7pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p><span style=\"font-weight:bold\">4</span></p></td><td style=\"width:51pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">A3</span></p></td><td style=\"width:61.7pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">P3</span></p></td><td style=\"width:45.35pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">AMB-3</span></p></td><td style=\"width:31.7pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">F3</span></p></td><td style=\"width:53pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">BBB+</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">BBB</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">BBB-</span></p></td><td style=\"width:45.9pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">Baa1</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">Baa2</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">Baa3</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\"></span></p></td><td style=\"width:45.9pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">bbb+</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">bbb</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">bbb-</span></p></td><td style=\"width:38.8pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">BBB+</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">BBB</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">BBB-</span></p></td></tr><tr><td style=\"width:32.7pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p><span style=\"font-weight:bold\">5</span></p></td><td style=\"width:51pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\"></span></p></td><td style=\"width:61.7pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\"></span></p></td><td style=\"width:45.35pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\"></span></p></td><td style=\"width:31.7pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\"></span></p></td><td style=\"width:53pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">BB+</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">BB</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">BB-</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\"></span></p></td><td style=\"width:45.9pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">Ba1</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">Ba2</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">Ba3</span></p></td><td style=\"width:45.9pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">bb+</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">bb</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">bb-</span></p></td><td style=\"width:38.8pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">BB+</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">BB</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\">BB-</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\"></span></p></td></tr><tr><td style=\"width:32.7pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p><span style=\"font-weight:bold\">6</span></p></td><td style=\"width:51pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">B</span></p></td><td style=\"width:61.7pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">NP Vulnerable</span></p></td><td style=\"width:45.35pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">AMB-4</span></p></td><td style=\"width:31.7pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">B</span></p></td><td style=\"width:53pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">B+,B, B-</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\"></span></p></td><td style=\"width:45.9pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">B</span></p></td><td style=\"width:45.9pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">b+, b, b-</span></p></td><td style=\"width:38.8pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">B+,B, B-</span></p><p style=\"text-align:center\"><span style=\"font-weight:bold\"></span></p></td></tr><tr><td style=\"width:32.7pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p><span style=\"font-weight:bold\">7</span></p></td><td style=\"width:51pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-left:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">C</span></p></td><td style=\"width:61.7pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-left:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">NP Currently Vulnerable</span></p></td><td style=\"width:45.35pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-left:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\"></span></p></td><td style=\"width:31.7pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-left:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">C</span></p></td><td style=\"width:53pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-left:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">CCC or below</span></p></td><td style=\"width:45.9pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-left:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">Below B</span></p></td><td style=\"width:45.9pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-left:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">Below b</span></p></td><td style=\"width:38.8pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">CCC or below</span></p></td></tr></tbody></table>\n```\n\n  \nInvestments that have not been publicly rated, and cannot be shown by the use of appropriate methods to have equivalent credit risk characteristics to other rated assets, should be treated as follows:\n\n1.  Secured or mortgaged assets:\n\nA secured or mortgaged asset is an investment with collateral that is either an existing residential property or such other asset for which a substantive valuation has been obtained within the preceding 3 years.\n\nThe Counterparty Grade for secured or mortgaged assets is determined from the following table:\n\n```html\n<table cellspacing=\"0\" cellpadding=\"0\" style=\"width:366.45pt; margin-left:21.05pt; border:0.75pt solid #000000; border-collapse:collapse\"><tbody><tr><td style=\"width:102.9pt; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:justify\"><span style=\"font-weight:bold\">Counterparty Grade</span></p></td><td colspan=\"2\" style=\"width:115.2pt; border-right:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">Standard Residential Mortgage</span></p></td><td colspan=\"2\" style=\"width:115.2pt; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">Other Secured Asset</span></p></td></tr><tr><td style=\"width:102.9pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p><span style=\"font-weight:bold\">Loan to Value Ratio</span></p></td><td style=\"width:52.2pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">No LMI</span></p></td><td style=\"width:52.2pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">&gt;40% LMI</span></p></td><td style=\"width:52.2pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">No LMI</span></p></td><td style=\"width:52.2pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">&gt;40% LMI</span></p></td></tr><tr><td style=\"width:102.9pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">&lt;=60%</span></p></td><td style=\"width:52.2pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">2</span></p></td><td style=\"width:52.2pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">2</span></p></td><td style=\"width:52.2pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">3</span></p></td><td style=\"width:52.2pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">2</span></p></td></tr><tr><td style=\"width:102.9pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">&gt;60% but &lt;=80%</span></p></td><td style=\"width:52.2pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">2</span></p></td><td style=\"width:52.2pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">2</span></p></td><td style=\"width:52.2pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">4</span></p></td><td style=\"width:52.2pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">3</span></p></td></tr><tr><td style=\"width:102.9pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">&gt;80% but &lt;=90%</span></p></td><td style=\"width:52.2pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">3</span></p></td><td style=\"width:52.2pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">2</span></p></td><td style=\"width:52.2pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">5</span></p></td><td style=\"width:52.2pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">4</span></p></td></tr><tr><td style=\"width:102.9pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">&gt;90% but &lt;=100%</span></p></td><td style=\"width:52.2pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">4</span></p></td><td style=\"width:52.2pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">3</span></p></td><td style=\"width:52.2pt; border:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">5</span></p></td><td style=\"width:52.2pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; border-bottom:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">4</span></p></td></tr><tr><td style=\"width:102.9pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">&gt;100%</span></p></td><td style=\"width:52.2pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-left:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">5</span></p></td><td style=\"width:52.2pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-left:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">4</span></p></td><td style=\"width:52.2pt; border-top:0.75pt solid #000000; border-right:0.75pt solid #000000; border-left:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">5</span></p></td><td style=\"width:52.2pt; border-top:0.75pt solid #000000; border-left:0.75pt solid #000000; padding-right:5.03pt; padding-left:5.03pt; vertical-align:top\"><p style=\"text-align:center\"><span style=\"font-weight:bold\">5</span></p></td></tr></tbody></table>\n```\n\nLoan to Value Ratio is the ratio of the value of the asset (i.e. loan) to the market value of the collateral. The market value of the collateral is the value at inception or, where a substantive valuation has subsequently been carried out, this subsequent valuation.\n\nA standard residential mortgage is a mortgage on existing residential property which is marketable, and where the insurer has a documented lending policy and procedures manual specifying:\n\n-   the process for assessing the ability of the borrowers to meet repayment obligations;\n-   verification procedures to substantiate critical application data provided by borrowers;\n-   the criteria used to justify the value of the collateral where a formal valuation is not obtained;\n-   procedures for determining whether a formal valuation, or revaluation, of the collateral is required; and\n-   procedures for assessing the marketability of the collateral.\n\nLMI refers to lenders mortgage insurance. “>40% LMI” refers to mortgages where insurance cover has been obtained for all realised losses up to at least 40 per cent of the original loan amount. Such insurance must be with an acceptable lenders mortgage insurer, being an insurer that is authorised for that purpose by APRA or domiciled in a country that APRA considers to have comparable prudential regulation of LMIs in accordance with criteria established for the purpose of ADI regulation under AGN 112.1.\n\n1.  Investments that are not secured are to have a Counterparty Grade of 6.\n\nWhere investments are held via a trust which has itself been separately rated by a recognised rating agency, that rating may be applied to all the investments in the trust in lieu of the ratings of the individual trust assets provided that the trust is treated as a single investment for asset concentration purposes and is not subject to “look-through”. When a look-through approach is adopted the underlying assets need to be individually rated. If the trust is separately rated, that overall trust rating cannot be applied to the individual underlying assets.\n\nInsurers should, in general, use the same rating agency for determining counterparty gradings. Where the insurer has counterparties with multiple ratings from two or more of the rating agencies in the table above, the insurer should consistently choose the ratings of a single agency whenever possible. For example, an insurer may have a number of counterparties that are rated by Standard & Poor’s and AM Best. In this case, the insurer should choose a single agency that will be consistently used whenever the individual ratings conflict.\n\nAPRA’s approval must be sought if an insurer wishes to use the rating determined by a rating agency not included in the table above.","sortOrder":34}],"analysis":{"kimi_summary":{"_metrics":{"model":"kimi-k2.5","source":"moonshot-realtime","completionTokens":2744},"content_quality":"ok","complexity_score":8,"scope_assessment":{"changed":true,"description":"This version significantly expanded scope to harmonize treatment of friendly societies with other life insurance companies, bringing benefit funds under the same valuation and capital standards as statutory funds following the lapse of ASIC Class Order 99/1225. It also incorporated alignment with International Financial Reporting Standards and introduced transitional arrangements from previous versions of the standards (AS 1.03, AS 6.02, etc.)."},"complexity_factors":["Extensive defined terms requiring cross-referencing to a consolidated dictionary (over 80 specialized terms)","Mathematical projection methodologies involving discount rates, best estimate assumptions, and recursive profit margin calculations","Differential treatment of contract types: participating benefits, non-participating benefits, life investment contracts, and discretionary participation features","Multi-tiered capital adequacy framework with distinct solvency, capital adequacy, and management capital requirements","Complex resilience reserve formulas incorporating diversification factors, credit risk default factors, and prescribed yield changes across asset sectors","Conditional logic for loss recognition, expense allocation, and reinsurance treatment requiring actuarial judgement","Integration with external standards including the Life Insurance Act 1995, Australian Accounting Standards (AASB), and APRA Prudential Rules"],"plain_english_summary":"This instrument sets technical rules requiring Australian life insurers and friendly societies to value policy liabilities on best-estimate bases, recognise profits and losses over a policy’s life, allocate expenses appropriately, and hold specified capital to remain solvent. It binds insurers, friendly societies, their appointed actuaries and APRA, and protects policyholders by ensuring realistic valuations and sufficient reserves to meet claims in adverse conditions."}},"importantCases":[],"_links":{"self":"/api/acts/record-of-resolutions-of-the-life-insurance-actuarial-standards-board-actuarial-standards-incorporat","history":"/api/acts/record-of-resolutions-of-the-life-insurance-actuarial-standards-board-actuarial-standards-incorporat/history","analysis":"/api/acts/record-of-resolutions-of-the-life-insurance-actuarial-standards-board-actuarial-standards-incorporat/analysis","conflicts":"/api/acts/record-of-resolutions-of-the-life-insurance-actuarial-standards-board-actuarial-standards-incorporat/conflicts","importantCases":"/api/acts/record-of-resolutions-of-the-life-insurance-actuarial-standards-board-actuarial-standards-incorporat/important-cases","documents":"/api/acts/record-of-resolutions-of-the-life-insurance-actuarial-standards-board-actuarial-standards-incorporat/documents"}}