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)
4The Valuation of Policy Liabilities
Start here
Get a plain-English read of 4
Turn the raw legal text into a practical explanation grounded in 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).
SECTION 4 The Valuation of Policy Liabilities
Overview
Benefits 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.
Participating Benefits
Where Participating Benefits are provided the policy owner is entitled to share in the profits of the business.
The 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.
The profit for Participating Benefits includes provision for:
Bonuses (policy owner profits); and
Shareholder Profits.
Policy Liability =
Best Estimate Liability
plus Value of future Best Estimate Bonuses
plus Value of future Best Estimate
Shareholder Profits
Non-Participating Benefits
Where Non-Participating Benefits are provided, profit is entirely the entitlement of the shareholder.
Policy Liability =
Best Estimate Liability
plus Value of future Best Estimate Shareholder Profits
The 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.
Friendly Society Benefits
Friendly society benefits are neither participating nor non-participating.
For 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.
4.1 Participating Benefits
4.1.1 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:
- the value of expected future Policy Owner Profit Share; and