2Policy Liabilities in Respect of Life Investment Contracts

SECTION 2 Policy Liabilities in Respect of Life Investment Contracts

Life 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.

The 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.

Life 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.

Embedded 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.

Policy Liability of a Life Investment Contract

2.1 The Policy Liability in respect of a Life Investment Contract is determined as

Policy Liability = LICL + MSE

where

LICL = the Life Investment Contract Liability, being the liability arising in respect of the Financial Instrument Element

MSE = the net liability (asset) in respect of the Management Services Element.

Life Investment Contract Liability

2.2 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).

Management Services Element

2.3 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.

Reinsurance of Life Investment Contracts