11Loss Recognition

SECTION 11 Loss Recognition

Overview

Where 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.

A 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.

11.1 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.

11.2 Cumulative losses may be run-off in accordance with the run-off of the business of the relevant Related Product Group.

11.3 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:

1. firstly, in offsetting the cumulative losses; and then
2. to the extent available, in producing Profit Margins in excess of the Adequacy Threshold.

11.4 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.

11.5 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:

1. 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