1Contract Classification and Application

SECTION 1 Contract Classification and Application

APRA’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”).

Prudential 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.

1.1 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.

1.2 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.

1.3 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.

1.4 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.

1.5 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.

1.6 Part D of this standard applies to all of the life insurance business issued by the company for the purposes of the Act.